Conference on “How to Increase the Effectiveness of
Financial Education” at Dartmouth College
Published in the Journal of Behavioral Finance, 2005, Vol. 6, No. 2
By Julie Agnew and Lisa Szykman
The College of William and Mary
October 2005
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Motivation
Despite the important role 401(k) assets play in an
individual’s retirement, evidence suggests that
many defined contribution participants follow the
“path of least resistance” in their financial decision
making [Choi, Laibson, Madrian and Metrick, 2002]
One theory that may partially explain this
phenomenon is that individuals are experiencing
information overload
Experimental techniques offer a unique way to test
how different 401(k) plan designs influence
information overload and investment decisions
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Research Goals
To explore how three common differences
among defined contribution plans…
1) the number of investment choices offered,
2) the similarity of the choices, and
3) the display of the choices
… lead to varying degrees of information
overload and satisfaction
To examine how the number of individuals opting
for the default investment option changes based
on these three differences
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Related Literature: Information and
Decision Making
 Research suggests that rather than processing more
information when decisions become more complex,
consumers tend to reduce the amount of effort they expend
[Payne, Bettman and Johnson, 1998; Payne, Bettman and
Luce,1996]
 Consumers tend to use information more extensively if it
costs less time and/or money to acquire [Stigler, 1961;
Nelson, 1970, 1974]
 Consumer researchers find an inverted U-shaped
relationship between information search and knowledge
In other words, consumers with moderate level of knowledge
search the most before making a product choice [Bettman and
Park, 1980]
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Related Literature: Food, 401(k)s and
Information Overload
How does nutritional labeling relate to 401(k) plans?
Consumer research finds that as dependable
information becomes easier to utilize, consumers use
the information more to determine food quality, acquire
more nutritional information prior to purchase, and
improve their overall decision quality [Roe, Levy and
Derby, 1999; Ippolito and Mathios, 1990, 1994;
Moorman 1990, 1996; Muller 1985]
Across 401(k) and 403(b) plans investment choices are
not presented in one consistent and easy to use format
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Related Literature: Food, 401(k)s and
Information Overload (-Cont-)
Can there really be too much chocolate?
Interesting experimental research by Iyengar and
Lepper (2000) demonstrates that too many
choices can inhibit decision making
Some 401(k) evidence from home and abroad
suggests that the number of choices can influence
investment behavior [Sethi-Iyengar, Jiang and
Huberman 2004; Weaver 2002]
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Basic Experiment Setup: The Allocation
Decision
In both experiments, participants were asked to
allocate a factitious $1,000 in retirement savings
among several mutual funds
They were also given the option to put their entire
$1,000 in a conservative default option (money
market fund)
To aid in the decision making, eleven commonly
reported financial statistics were provided for each
fund
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Basic Experiment Setup: Measuring
Overload and Financial Literacy
After making their allocations, participants
completed a two part survey
Part one of the survey included questions designed
to measure the participant’s feelings of information
overload and satisfaction
Part two of the survey tested the participant’s
financial knowledge with a ten question exam and
included several demographic questions
Based on the mean of the exam score,
participants were divided into two groups: highknowledge and low-knowledge
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Experiment Participants
 Participants were solicited through campus mail, e-mail and
flyers during the summer months of 2003
 Participants earned ten dollars for their participation and were
entered in a $500 raffle
 The participants’ ages were well distributed in the sample
 A majority of participants were female, married and had children
Percent of Sample by Demographic Category
80%
71%
68%
67%
70%
60%
50%
40%
32%
26% 25%
30%
20%
13%
10%
Ch
ild
re
n
ed
ith
M
al
e
Fe
m
ar
ri
W
Source: Experiment One
>5
0
Un
de
r3
0
30
-3
9
40
-4
9
0%
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Experiment Participants-Cont.
The sample included a broad representation of
occupations, salaries and education levels
Percent of Sample by Profession, Salary and Education
35%
30%
25%
20%
15%
10%
Graduate Degree
Some Graduate Work
College Graduate
Some College
>$60,000
$40,000-$59,999
$30,000-$39,999
$20,000-$29,999
$0-$19,999
Secretarial
Maintenance
High School or Less
Source: Experiment One
Professional
0%
Professor
5%
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Financial Literacy
 The mean scores on the exam were fairly low (3.73, 3.84)
 Based on a simple OLS regression, test scores
were lower for females,
increased with age,
decreased with children,
increased with salary,
and increased with education
 The correlation between participants’ test score and
personal perception of their own relative knowledge varied
based on occupation, salary and education
occupation- maintenance (.17) versus professor (.77)
salary- $0-$19,999 (.42) versus greater than $60,000 (.55)
education- high school (.10) versus graduate degree (.59)
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Experiment One: Manipulating the
Display and Number of Choices
Fund choices presented in either a table (low
search cost) or booklet (high search cost) format
The number of investment choices varied from
six funds (low number of choices) to sixty funds
(high number of choices)
Individuals were divided into high or low
knowledge categories based on their test score
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Experiment One: Summary of Main
Findings
 Tested Financial Knowledge
The reported mean overload was lower for the high-knowledge group
The reported mean satisfaction was greater for the high-knowledge group
High-knowledge individuals chose the default less often than lowknowledge participants (2% versus 20%)
 Number of Choices
The reported mean overload was greater for the group given more
choices
 Type of Information Display
The reported mean overload was not significantly related to the
information display
The reported mean satisfaction was higher for participants given the table
 Number of Choices and Tested Financial Knowledge
High-knowledge participants reported more overload when presented with
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more choices
Experiment Two: Manipulating the Similarity of
the Options and the Number of Choices
The investment funds offered were either highly
similar or very distinct
Similar options were found by choosing funds that were listed under
the same Morningstar category, had comparable investment
strategies and similar performance
The number of investment choices varied from six
funds (low number of choices) to sixty funds (high
number of choices)
All investment information presented in the low
search cost table format used in Experiment One
Participants divided into high and low knowledge
categories based on exam performance
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Experiment Two: Summary of Main
Findings
 Tested Financial Knowledge
The reported mean overload was lower for the high-knowledge
group
The reported mean satisfaction was greater for the highknowledge group
High-knowledge individuals chose the default less than lowknowledge participants (4% versus 25%)
 Number of Choices
The reported mean overload was greater for the group given
more choices
The reported mean satisfaction was lower for the group given
more choices
 Similarity of Choices
The reported mean satisfaction was higher for the group given
more distinct choices
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Conclusions
 Financial knowledge plays a role in the effectiveness of plan design
 When designing 401(k) plans and educational programs, sponsors
should consider that participants’ perceptions of their own relative
knowledge may not be accurate
 The paper’s findings suggest some interesting areas for future
research
Area 1: How does an individual’s actual financial knowledge and
perception of their own relative knowledge affect their interest
and participation in financial education programs?
Area 2: Can a financial education program change the propensity
for low knowledge participants to choose the default option?
Area 3: How does the default option influence investment choices
for those who do not invest their entire portfolio in the default
option?
Area 4: Are there other ways to improve the presentation of
investment information?
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