Monday, 21 April 2008

Choice and pensions again

More on how an excess of choice leads to wonky decision-making. This is from a sponsored (blurgh...!) feature from Axa in the latest Pensions Age.

Interesting findings here:

[R]esearchers appear to have proved that uninformed people often make irrational decisions, as the following headline findings indicate.

* Diversification heuristic. A choice of four equity funds and a cash fund typically results in 80% investment in equities.
* Decisions are heavily influenced by the number of fund options on an application form.
* Extensive choice discourages risk taking and heightens an individual’s fear of losing money. For example, for every ten funds added to choice, allocation to cash funds increases by 4%.
* Alarmingly, for every ten funds added, the number of people who elect to join a scheme falls by 2%.

And an obvious example of anchoring here:

A study by Vanguard Group (2003) looked at member allocations to equity investment funds. The research found allocations were heavily influenced by market conditions at the time of joining, Because most people failed to review their equity fund allocations, their exposure was illogically anchored to the bull or bear market conditions prevailing when they first invested.

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