BeFi Web Seminar for January 30, 2007
Motivating Consumer Financial Behavior
Through Choice-Set Characteristics
© BeFi Forum 2007
by Sheena S. Iyengar
Professor
Columbia Business School
Motivating Consumer
Financial Behavior
Through Choice-Set
Characteristics
Sheena S. Iyengar
Columbia University Business School
About Me
Education
 PhD in Social Psychology, Stanford University 1997
 Undergraduate: University of Pennsylvania
 BS Economics, Wharton School of Business - 1992
 BA Psychology, College of Arts & Sciences – 1992
Awards and Honors
 Presidential Early Career Award
 Full Grant, Citigroup Behavioral Sciences
Research Council
 Invited Fellow, Institute for Advanced Studies,
Princeton
My Research Interests
What are the consequences when
people face choice sets with increasing
numbers of options?
How does it affect people’s
 Decision quality
 Satisfaction with choices made
Choice Then and Now
New York Stock Exchange
3500
3000
2500
2000
1500
1000
500
00
20
95
90
19
19
85
19
80
19
75
70
19
19
65
19
60
19
55
50
19
45
19
19
40
35
19
19
30
0
19
Number of Companies Listed
Increase in Options and
Combinations of Options
Number of Mutual Funds
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
6 Jams
24 Jams
More Choice: Appealing
But Debilitating
Number of people who
ACTUALLY BOUGHT
6 JAMS
24 JAMS
Graphics source:
Simon Fraser,
Fidelity International
What if choosers are given
incentives for choosing?
Consider retirement savings
programs in which not
choosing is financially
detrimental
Vanguard Data
Individual-Level Characteristics
Number of employees
793,794
Participation rate
71%
Average contribution
$3,848
Max out rate
12%
Median annual income
$47,430
Gender distribution
63% male
Mean age
42 yrs
Vanguard Data
Plan-Level Characteristics
124 include company
stock as an option
647 Plans
47 match in company
stock only
316 offer Defined Benefit
plans
2-59 Funds Offered
90% offer between 6 and
22 funds
18 offer more than 30
funds
The Effect of Choice on
Savings Behavior
75%
70%
65%
60%
55%
# Funds Offered
59
56
53
50
47
44
41
38
35
32
29
26
23
20
17
14
11
8
5
50%
2
Predicted Participation
80%
+ 10 Funds = + Money Market
Percent Change in Allocation
10
8
%
6
4
2
0
-2
Allocation to
Cash Funds
Probability of
Allocating More
than 50%
+10 Funds =
+ Money Market & Bond
Percent Change in Allocation
10
8
%
6
4
2
0
1
2
Allocation to
Cash &
Bond Funds
Probability of
Allocating More
than 50%
+10 Funds = - Equity
Allocation to
Equity Funds
0
Probability of
Allocating to Equity
Funds
-2
-4
%
-6
-8
-10
-12
-14
Percent Change in Allocation
Asset Allocation
 Participants generally allocated their
contributions to 3 or 4 funds,
regardless of the number in their plan
 Allocated evenly between plans – the
“conditional 1/N rule”
 Allocation to equities did not increase
with number/proportion of equity funds
in plan
Huberman and Jiang, Journal of Finance April 2006
Choosing From 3 Gambles
Thank you for participating in the experiment. For compensation, please
select one of the gambles below. The experimenter will then flip a coin.
Should the coin land on “heads,” you will receive the amount specified in
the left column. Should the coin land on “tails,” you will receive the
amount specified in the right column. Please check off the desired
gamble and the experimenter will proceed to flip the coin.
Please place a
check next to the
desired option
If the coin indicates
“heads”
If the coin
indicates “tails”
$5.00
$5.00
$13.50
$0.00
$8.75
$3.50
Choosing From 11 Gambles
Please place a
check next to the
desired option
If the coin
indicates
“heads”
If the coin
indicates “tails”
$4.00
$8.25
$11.75
$1.00
$5.00
$5.00
$4.50
$7.75
$1.50
$11.25
$13.50
$0.00
$8.75
$3.50
$9.50
$3.00
$12.50
$0.50
$2.50
$10.00
$10.50
$2.00
Effect of Choice Set Size on
Gambling
Gamble Chosen by Participants (%)
Low Choice
High Choice
80
70
60
50
40
30
20
10
0
Sure Bet
Risky Gamble
3 Gambles, 6 Payoffs Each
Thank you for participating in the experiment. For compensation, please
select one of the gambles below. The experimenter will provide you with
a die. You will cast the die and, depending on how the die falls, receive
the amount of money indicated in the table below. Please check off the
desired gamble.
Please
place a
check next
to the
desired
option
If the
die
falls on
1, you
receive
If the
die
falls on
2, you
receive
$0.00
$0.00
If the
die
falls
on 3,
you
receive
$0.00
If the
die
falls
on 4,
you
receive
$10.00
If the
die
falls
on 5,
you
receive
$10.00
If the
die
falls
on 6,
you
receive
$10.00
$9.25
$7.00
$0.75
$8.75
$1.25
$1.50
$9.75
$8.50
$0.75
$0.00
$4.25
$5.50
11 Gambles, 6 Payoffs
Each
Please
place a
check next
to the
desired
option
If the
die
falls on
1, you
receive
If the
die
falls on
2, you
receive
If the
die
falls on
3, you
receive
If the
die
falls on
4, you
receive
If the
die
falls on
5, you
receive
If the
die
falls on
6, you
receive
$7.00
$1.50
$9.25
$0.75
$8.75
$1.25
$4.25
$5.50
$0.00
$8.50
$0.75
$9.75
$1.00
$2.00
$6.75
$7.50
$5.75
$4.75
$0.00
$0.00
$0.00
$10.00
$10.00
$10.00
$5.50
$7.50
$0.75
$6.75
$1.00
$6.50
$9.75
$8.00
$0.00
$0.00
$2.75
$8.75
$3.00
$1.50
$6.50
$9.75
$7.00
$0.50
$3.25
$1.50
$1.50
$2.50
$9.50
$10.00
$3.25
$8.50
$5.50
$8.50
$0.00
$2.50
$3.75
$7.75
$2.00
$9.25
$3.25
$2.00
$1.25
$0.75
$4.50
$8.75
$4.50
$8.50
Gamble Chosen by Participants (%)
Preference for the Binary
Gamble
60
50
40
30
20
10
0
Low Choice
High Choice
Branching Out
Future research need not be limited to
401(k) plans, but could include
 Mutual funds
 Lending
 Insurance
 Credit cards
Further Directions
Consumer Choice Over Time
 Does choice overload have a persistent or
temporary effect on participation rates?
 What effect does increasing or decreasing the
number of funds in a plan have on consumer
behavior?
 Data requirements: Multi-year data on
customers’ decisions, ideally longitudinal
Further Directions
Option Presentation
 As the number of options rises, which
attributes remain/become predictive of
consumer choice?
 Order of presentation
 Clarity
 Similarity or distinctness from other options
 Data requirements: Choice data linked
to arrangement and characteristics of
choice-set items
Further Directions
Optimal Number of Options
 What number of options results in the highest
consumer participation?
 How does this number vary by
 Domain (e.g. mutual funds vs. insurance policies vs.
insurance policies)
 Customer (e.g. age, expertise)
 Time horizon (e.g. short-term vs. mortgage loans)
 Data requirements: Data on a variety of
products/services, or could be addressed
through field studies and questionnaire data
Further Directions
Multiple-Domain Choice Interaction
 How do choices in one domain (e.g.
mutual funds) affect choices made in
another (e.g. insurance policies)?
 Are people consistent across domains
in their responses to choice?
 Data requirements: Data from
providers of comprehensive financial
services
Questions?
Contact Information
Until June 2007
Permanent
Organizational Behaviour A303
London Business School
Regent's Park
London NW1 4SA
United Kingdom
Uris Hall 714
Columbia University Business School
3022 Broadway
New York, NY 10027
siyengar@london.edu
ss957@columbia.edu
Switchboard: +44 (0)20 7000
7000
Direct line: +44 (0)20 7000 8931
Extension: 8931
Phone: (212) 854 8308
http://www.columbia.edu/~ss957