If you’ve taken a course in behavioral economics, the phrase “the 401(k) study” is all you need to know what I am talking about. But not everyone has taken a course in behavioral economics, so here’s ChatGPT with an explainer:
In Thaler and Benartzi’s work on retirement savings, they explore how simplifying the number of choices in defined contribution plans, like 401(k)s, can actually help increase active participation by investors. They found that when faced with too many investment options, individuals often experience choice overload, which can lead to decision paralysis or naïve diversification—where people spread their investments evenly across available options without considering their merit. By reducing the number of choices, plan designers can help reduce the complexity and anxiety associated with making investment decisions, encouraging more thoughtful and deliberate engagement from investors. This approach not only helps individuals feel more confident about their decisions but also can lead to better investment outcomes, aligning more closely with their retirement goals.
Or, if reading about academic research ain’t your thing, watch Vishy Anand at work as he orders a sandwich in Subway:
But long story short: choices matter, yes, but there is such a thing as too much choice.
This is a well studied phenomenon in many different domains. There are quite a few books on the topic too, of which I would suggest two as being well worth your time, The Art of Choosing, and The Paradox of Choice.
But what phenomenon, exactly, am I talking about when I say that it is well studied? The phenomenon that too much choice can overwhelm the chooser.
Ah, but why? Why should too much choice overwhelm our brains? What is it about our brains that makes us stop and “give up”? Is there something specific about the way our brains are wired or structured?
Turns out there is!
In terms of distinguishable alternatives, this mean corresponds to about 6.5 categories, one standard deviation includes from 4 to 10 categories, and the total range is from 3 to 15 categories. Considering the wide variety of different variables that have been studied, I find this to be a remarkably narrow range.
Miller, George A. “The magical number seven, plus or minus two: Some limits on our capacity for processing information.” Psychological review 63, no. 2 (1956): 81.
There seems to be some limitation built into us either by learning or by the design of our nervous systems, a limit that keeps our channel capacities in this general range. On the basis of the present evidence it seems safe to say that we possess a finite and rather small capacity for making such unidimensional judgments and that this capacity does not vary a great deal from one simple sensory attribute to another.
The human brain, it would seem, can identify about seven categories comfortably. Interval estimates are almost always better than point estimates, of course, and so perhaps it is better to say somewhere between four to ten categories. But however you choose to put it, there is a limit to how much information we can classify, and therefore process, and it seems to be centered around the number seven.
By the way, the paper talks about a lot of other things, including a concept called chunking, which is equally fascinating. Please read the whole paper – it is very short, and immensely readable. Second, note that identification is different from remembering, and remembering itself can be of multiple sorts – short term and long term, for example.
If you’re anything like me, you’re dying to ask the following questions:
- Is it seven regardless of who is identifying which category? Can a singer do a better job at identifying pitch, for example? Can an artist do better at identifying hues or colors? Can batsmen identify bat weights better than other folks? You might think I’m joking about that last one, so go watch Steve Smith in action:
2. Can folks be trained to get better at increasing the number of categories they are comfortable with?
3. Does age have an influence? Gender? Level of education? Has it always been seven or has the number changed across time? If yes, in which direction? How do we know?
… and on and on. A good place to get started, if you are so inclined, is with Google Scholar, for that paper has been cited a remarkable 42,174 times.
Well, imagine you are a marketer, looking to offer choices to potential customers. How many choices are optimal? Too few choices might leave you with a grumpy customer, but offer too many, and Vishy Anand may choose to run rather than pay. And so the number of choices should be…?
Or imagine that you are a teacher teaching a particularly complex topic, and you are looking to simplify a particularly devilish topic. How many categories should you split your explanation into…?
Let’s say you are a public policy analyst, and are looking to provide complicated information for quick processing at, say, a railway station (or an airport, or at a government office, or <insert setting of your choice here>). The number of categories in your explanation should not be more than…?
All this still does not answer the question of why.
Why seven? Well, the good news is that you and I aren’t the first people to be tormented by this question:
And finally, what about the magical number seven? What about the seven wonders of the world, the seven seas, the seven deadly sins, the seven daughters of Atlas in the Pleiades, the seven ages of man, the seven levels of hell, the seven primary colors, the seven notes of the musical scale, and the seven days of the week? What about the seven-point rating scale, the seven categories for absolute judgment, the seven objects in the span of attention, and the seven digits in the span of immediate memory? For the present I propose to withhold judgment. Perhaps there is something deep and profound behind all these sevens, something just calling out for us to discover it. But I suspect that it is only a pernicious, Pythagorean coincidence.
Miller, George A. “The magical number seven, plus or minus two: Some limits on our capacity for processing information.” Psychological review 63, no. 2 (1956): 81.
I leave you with the Wikipedia entry for the number 7.
(My thanks to Mihir Mahajan for recommending that I read this paper)
EconForEverybody 