How to Beat Our Status-Quo Bias
We can improve our ability to make investing decisions by procrastinating a bit, focusing on fewer options and settling for good enough.
Psychologists have labeled our collective human sloth the status-quo bias. And studies show that this tendency to stick with what we already have is particularly harmful when it comes to investing. Too often we cling to the status quo when figuring out how much to save for retirement or when to change our investments, for example.
But making such momentous decisions isn't easy, either. And on the face of it, choosing among thousands of stocks and mutual funds to fill our portfolios is a "preposterous" task, says Barry Schwartz, professor of psychology at Swarthmore College and a decision-science guru.
A few simple steps, however, can markedly improve our decision-making. Surprisingly, the most effective way to beat the status-quo bias is to procrastinate a bit. When we are prompted to make a quick decision, human nature nudges us toward a default option; a little delay often helps us pick a better alternative. According to research by psychologist Niels van de Ven, of the Tilburg Institute for Behavioral Economics Research in the Netherlands, subjects chose the default option 82% of the time when asked to decide immediately but only 56% of the time after some delay.
Delaying a few days lets us consider a decision when we're well rested and in a different mood. And don't underestimate the importance of a good night's sleep, says psychologist Christopher Chabris, coauthor of The Invisible Gorilla ... And Other Ways Our Intuitions Deceive Us. Studies have shown that "fatigue has huge negative effects on decision-making -- much worse than you would expect," says Chabris.
Schwartz, author of The Paradox of Choice: Why More Is Less, counsels that narrowing your field of choices is also a good move. Having too many alternatives is not just confusing, it can actually make you depressed. Schwartz thinks Fidelity's prepackaged Freedom mutual funds, which include different types of stocks, bonds and other investments, are aptly named. "They mean freedom from choice, not freedom to choose," says Schwartz.
Narrowing your options when it comes to investments is crucial. Without some methodology, picking mutual funds from among the more than 24,000 available becomes the preposterous task Schwartz suggests. Such an overwhelming selection leaves us vulnerable to being influenced by a laundry list of psychological biases, including overconfidence, short-term thinking and herd mentality.
To pick mutual funds, let me suggest using our Kiplinger fund-finder tool in combination with the analysis of senior associate editor Andrew Tanzer, our mutual funds specialist. This thoughtful and systematic approach will quickly narrow choices to a logical few.
Settle for Less
Schwartz has another decision-making strategy that combats status-quo bias while making it easier to pick investments and make financial decisions. It's the idea of being a satisficer instead of a maximizer, a distinction coined by psychologist Herbert Simon in the 1950s. A maximizer will consider every possibility in the endless pursuit of perfection -- and in so doing can succumb to analysis paralysis -- while a satisficer uses a set of criteria to make good choices, but doesn't worry that something better exists.
When investing, maximizers chase returns, which often results in buying high and selling low. Their portfolio turnover is high, jacking up costs as well as anxiety. And they often concentrate on just a few assets they think will do best and neglect diversification.
But a satisficer, Schwartz says, realizes that predicting the performance of specific investments is a fool's game. Satisficers sleep easy with well-diversified portfolios that give "a good-enough return in the broadest possible circumstances," says Schwartz.