Too Many Choices?

This Knight-Ridder piece about Bush’s Health Savings Accounts raises an interesting question: do people have too many financial choices in their life already?

WASHINGTON – President Bush’s proposed expansion of Health Savings Accounts depends on a premise that research shows is questionable: that Americans want more financial choices in their lives.

Experts point to a lack of participant activity within 401(k) plans as a sign that many Americans already feel overwhelmed by financial options. The 401(k) experience points to both the risks of HSAs and the road ahead for health-care management.

…Do Americans, as Hubbard suggests, really want to shop for a cheaper doctor, x-ray or blood test? Research into Americans’ behavior with retirement savings plans suggests that they don’t. It shows that people, in fact, shrink from such decisions.

In 2004, Hewitt Associates, a global consultant specializing in workforce issues, found that only 17 percent of participants in 401(k) plans had made a single transaction beyond automatic contributions deducted from their paychecks. Only half of eligible workers in their 20s opt into 401(k) plans.

“The average person is not making any choices on a proactive basis, on an annual basis. We have more anecdotal evidence that the individuals are not really sure what the choices are,” said Lori Lucas, director of retirement research for Hewitt.

Economists generally assume that having more choices is better than having fewer choices. The reasoning is as follows. Suppose you give someone a third choice about something when they originally had only two choices. It’s possible that the person will choose one of their original two choices, in which case the addition of the third option was irrelevant to them. But it’s also possible that the person will select the new option, which will necessarily make them better off (since they presumably liked the third option more than the first two). Thus the worst that can happen is that the person is left no better off from the third choice, and it’s possible they could be decidedly better off.

But this reasoning ignores the fact that it may be costly for individuals to learn enough about the new choice to be able to eliminate it from consideration. This cost of having to make more choices is what the piece quoted above is referring to. And in an area about which people are already often confused and at a huge informational disadvantage (health care), it seems like a distinct possibility that this story has it exactly right.