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HOW MORE CHOICES ARE DEMOTIVATING: IMPACT OF MORE OPTIONS ON 401(K) INVESTMENT *

Prior psychological studies documented the choice overload phenomenon (i.e., more choice leads to decreased probability that individuals choose to choose) in experiments using small consumer products. This paper examines whether such phenomenon exists in a non-experimental setting of defined-contribution retirement savings. Using records of 401(k) participation and contribution allocation for nearly 800,000 eligible employees from Vanguard, we find that for every ten funds added to the choice menu, (i) the average employee’s participation probability is lowered by about 2%; (ii) the contribution allocation to safe funds (money market and bond funds) is 5.4 percentage points higher; (iii) the contribution allocation to stock funds is 7-9 percentage points lower. Such evidence supports predictions of the choice overload hypothesis that more choices can de-motivate choosing and that under such conditions individuals may resort to simplifying decision-making heuristics.