In this post:

  • Choice Overload Means Less Buying and More Regret
  • Sustainable Investing is Especially Vulnerable to Choice Overload
  • The Overload Antidote: First, Help Clients Discover Their Preferences

I’ve previously blogged about the dark side of the ESG product boom, which is leading many investors (and the advisors who serve them) to be confused and overwhelmed.  Sitting underneath this problem is a well-documented phenomenon in consumer psychology called “overchoice”, or more commonly, choice overload.

Asset managers and wealth managers that don’t solve overload for their clients (and advisors) will see slower growth and greater client regret in their sustainable investing efforts.

Choice Overload Means Less Buying and More Regret

What is choice overload?

Academics define it as when the complexity of the decision problem faced by an individual (because of many choices) exceeds the individual’s cognitive resources.

In layman’s terms, too much choice can make it hard for your brain to pick out the best option for you.  That leads many consumers not to buy, and those who do are more likely to regret their purchase.

The seminal choice overload study is “When choice is demotivating: Can one desire too much of a good thing?” (Iyengar, Sheena & Lepper, 2000).  The study looked at jams.  Consumers shopping at a grocery store were presented with 6 jam choices versus 24 choices.  The ones facing 24 varieties were 90% (!) less likely to buy any jam at all.  And those who did buy were less satisfied, less confident they had chosen the best option and more likely to regret their purchase.

Sustainable Investing is Especially Vulnerable to Choice Overload

Since the jam study, academics have completed many choice overload studies across different categories, from chocolate to microwave ovens to mutual funds.  There are several factors that amp up the negative effects of too much choice.[i]  Sustainable investing suffers from most of these factors.

Amp factor #1: Choice set complexity – The research speaks especially about the presence or lack of a “dominant option”, meaning an option clearly superior to all other available options for the consumer.   When there’s no dominant option, greater choice magnifies the overload effect.  And that’s certainly the case with SI options.  Investors have a hard time identifying a clearly superior option for them.

Amp factor #2: Decision task difficulty – reflects factors that can make a decision task easy or tough, such as the number of attributes describing each option.  For example, it’s much easier to pick among eggs (attributes: color, size, free range or not) than among cars (attributes: type, engine, trim, color, powertrain, feature set, etc.).

Choosing among sustainable investment options is a high difficulty task.  In the realm of ESG ETFs alone, you’ve got asset class, integrated vs thematic, whether there are exclusions, theme focus, level of shareholder activism, and so on.  It’s tough to size up all of these attributes and really know how the options differ in each dimension.

Amp factor #3: Preference uncertainty – Do consumers understand the benefits of the choice options? Can they prioritize those benefits when trading off the pros and cons of each choice option?

Climate warrior investors are better equipped here—they know what fires them up and what they’re looking for in sustainable investing.  They have high preference certainty. But climate warriors are a small segment.

Preference uncertainty is a much bigger problem for investors who just haven’t (yet) connected the dots between their values and investments.  They are the ones increasingly having the “Aha!” moment[ii] where they realize they have a half million dollars sitting in a retirement account, and none of it is aligned with their values.  But just because they have the “Aha!” moment does NOT mean they have formed a clear set of SI preferences.

The Overload Antidote: First, Help Clients Discover Their Preferences

What should asset and wealth managers do to help with the choice overload problem?

Above all else, help clients discover their SI Preferences first, before showing them the product lineup or getting into ESG ratings or anything else about the investment options.

Why? Because once you (and your client) know their preferences, you can narrow and personalize the choice set from there.  That goes for the entire client experience, from your website to interactions with advisors.

When you’ve helped clients discover their own preferences, you’ll have taken a giant leap to sustain the sustainable investing boom.

[I]  “Choice Overload: a conceptual review and meta-analysis.” Chernev, Bockenholt, Goodman, 2015.
[II] The pandemic has driven something like 60% of high-net worth investors to have an “aha” moment like this, according to a recent study by UBS. “The new valuables.” UBS Investor Watch, June 2021.