Have a Cookie with Your 401(k)
Recent social psychological research on consumer decision making suggests that making choices and deciding among alternatives depletes mental energy. With each choice we make, it gets harder and harder to make the next choice, and our brains start looking for “shortcuts” to make the task easier. The research, reported this week in The New York Times Magazine, found that when our brains get fatigued from too many choices,
one shortcut is to become reckless: to act impulsively instead of expending the energy to first think through the consequences. . . . The other shortcut is the ultimate energy saver: do nothing. Instead of agonizing over decisions, avoid any choice.
But give the brain a hit of glucose (the basic fuel that runs cell functioning), and our willpower and rational decision-making are restored.
The findings are from multiple experiments over the past decade that relied on a variety of scenarios that both academic researchers and marketing people care a great deal about: selecting (and paying for) options on new car purchases, buying computers, shopping in malls or grocery stores, selecting fabrics for customized products, and making critical financial decisions that involve trade-offs between short-term rewards and long-term gains.
The findings also have implications for all kinds of marketing decisions and strategies. How many choices should consumers be offered? How difficult should those choices be? Should you offer a default or recommended option? Where in the decision process should the recommended option be offered?
One area in which Versta Research has done a great deal of work is in consumer attitudes and behaviors when it comes to saving, spending, and investing, particularly for retirement. We all know that few consumers are saving enough. Most consumers know this, too, but they struggle to make the most effective decisions. Bombarding them with education and tools seems to go only so far.
Fortunately, many financial services companies are doing a better and better job helping people save and invest more wisely. In part, they are doing it by taking advantage of our proclivities to “do nothing” when fatigued by choice, though nobody has understood until now why this works. The recent research cited here offers new insights that may help configure better choices and contexts for financial decision making, in part because it suggests an intriguing link to brain physiology:
Apparently ego depletion causes activity to rise in some parts of the brain and to decline in others. Your brain does not stop working when glucose is low. It stops doing some things and starts doing others. It responds more strongly to immediate rewards and pays less attention to long-term prospects.
So before you are faced with the task of configuring your 401k or making other long-term financial and investing decisions, here are a few tips at least suggested by the research cited here: Be well rested. Set aside time early in the day when your decision-making abilities are fresh. Avoid times right after you have made other significant choices or decisions, either at work, when shopping, or in your personal life. And the best suggestion of all? Have a cookie with your 401(k).
—Joe Hopper, Ph.D.