Outsmarting 'Choice Overload': Tips from the Authors of 'Out of Your Mind'

As adults, we make approximately 35,000 decisions every day, from mundane choices like what to wear to complex ones like where to invest our hard-earned money. While having options is generally a good thing, too many choices can lead to a state called 'choice overload,' where we struggle to make decisions or, worse, make poor ones. In their book 'Out of Your Mind,' authors Jorge Cham and Dwayne Godwin offer insights into understanding and overcoming this phenomenon. Let's explore some of their key points and how they can help us make better investment decisions.



Simplify your choice

One of the most effective strategies for dealing with choice overload is to simplify the decision-making process. Cham and Godwin suggest creating a decision rule, which is a sound method for choosing between options with multiple attributes. For example, when selecting a savings account, you can limit your options to only two types, then refine your choice based on other attributes like fees, interest rates, withdrawals, and balances. This approach can also be applied to investment decisions by narrowing down the options to a manageable number of funds or asset classes that align with your investment goals and risk tolerance.

Satisficing: The art of 'good enough'

Another valuable strategy is 'atisficing,' a decision-making approach that aims for a satisfactory or "good enough" solution rather than the optimal one. This approach recognizes that individuals often face limitations such as time, information, or cognitive resources, making it impossible to evaluate every possible option. In situations like this, when a "satisfactory" decision meets your objectives, it's more prudent to go ahead than wait for the optimal or the best solution. In the context of investments, satisficing can help you make decisions based on a reasonable level of research and analysis, rather than trying to find the perfect investment, which may not exist.



Prioritize decisions

The authors emphasize that financial decisions, such as mortgages and retirement planning, require careful consideration and expertise. These decisions can have long-term impacts, so it's essential to make wise choices. In the investment context, prioritizing decisions means focusing on the most critical aspects of your portfolio, such as asset allocation, diversification, and cost management, rather than getting bogged down in minor details or trying to time the market.



Set and forget

The 'et and forget' strategy involves setting up default spending or timed instructions for transfers to reduce the number of decisions you need to make regularly. This approach can be particularly useful for investment decisions, as it helps secure profits over a longer period by minimizing the temptation to revise strategies mid-way or relook at stocks or other investments, incurring transaction charges.



Limit choices

The authors mention that having too many choices can lead to 'analysis paralysis,' where you end up not being able to make a choice at all. To overcome this, you can limit the number of options you consider. For example, instead of evaluating hundreds of mutual funds or ETFs, you can narrow down your choices to a manageable number based on factors like fees, performance, and fund size.

In conclusion, the strategies outlined in 'Out of Your Mind' can help us overcome 'choice overload' and make better investment decisions. By simplifying choices, embracing satisficing, prioritizing decisions, setting and forgetting, and limiting choices, we can navigate the complex world of investments more effectively. So, the next time you find yourself overwhelmed by the sheer number of investment options, remember these tips and make a conscious effort to apply them in your decision-making process. Your financial future will thank you!

Take action now: Review your investment portfolio and apply these strategies to make more informed decisions. Start by simplifying your choices and prioritizing the most critical aspects of your portfolio. Then, consider automating some of your investment decisions and limiting the number of options you evaluate. By taking these steps, you'll be well on your way to outsmarting 'choice overload' and securing a more prosperous financial future.