The Terrors of Choice

Apparently launching his own personal effort to spare us all from the "paradox of choice," Barry Schwartz seems to have settled on a formula that allows him to churn out op-eds that have the same soothing monotony as his ideal supermarket shelf. The schtick is pretty straightforward: Pick some public controversy where the value of "choice" is adduced as a reason to support some insufficiently progressive policy, briefly regurgitate some of the familiar arguments against said policy by way of introduction, then bring out the paradox thesis—more choice is actually bad, because our poor brains become overwhelmed by all the options.

The formula's deployed in Schwartz's New York Times op-ed today, though not, alas, with results quite as hilarious as last time around. We can bypass the dumb "what if the markets dip at the exact time you'd most prefer to retire" and the stupendously circular "it's not 'your' money it's our money… once we've taxed it away" and focus on the familiar "choice paralysis" argument. First of all, the upshot seems to be only that faced with too many choices, people will fail to make any choice at all. Since Schwartz seems to think it would be foolish to elect to divert payroll tax into a private account, it's not wholly clear why that's a problem from his perspective. But assuming that it is, the specific evidence he brings to bear—that participation in private pension funds drops two percent for each 10 additional fund options—is so narrow that the objection ends up being the equivalent of a claim that democracy is hopeless because butterfly ballots are confusing. Surely a bright fellow like Schwartz could come up with a way to structure the system in tiers, such that novices would have a small number of easily-selected "defaults" while experienced investors would have access to a wider range of options. (In the same way that someone who finds themselves overwhelmed in the huge Whole Foods can spare themselves choice paralysis by choosing to patronize the smaller corner market.) But then, looking at ways to ameliorate the "paradox of choice," rather than using it as a bludgeon, doesn't appear to be part of the formula.

Comments

[david]

though your other criticisms are reasonable, what exactly is dumb about fearing to subject one's retirement savings to market dips? "the exact moment you choose to retire" is not a *choice* for everyone; and even those for whom it is need to fear not only a market dip on that day, but on any subsequent day as well-- unless the entire investment is cashed out in a lump sum immediately. once you're selling off stocks each month for rent, you no longer have the option to wait out market fluctuations.

along with "buddy, can you spare a dime?" the most persistent cartoon image of the great depression i've seen is elderly widows thrown out in the streets when the stocks they'd saved for retirement turned worthless. since the social security program was created specifically to address that problem, shouldn't any radical redesign of the program have to explain what it's doing to counter that fear?

[Warren]

the paradox thesis?more choice is actually bad, because our poor brains become overwhelmed by all the options.

Right that's why in the face of a thousand soft drink options, nobody is able to decide between Evian and Fruitopia. Much less between diet and regular. Soft drink sales suffer greatly from all the options. One wonders how so many options got to market in the first place.

[Julian Sanchez]

"once you're selling off stocks each month for rent"

That's not really the idea. Most plans involve purchasing some kind of annuity upon retirement that guarantees a minimum income, with any remaining funds above that level at the individual's discretion to cash out or continue investing.

[crimethink]

david,

The way to address that fear is to offer some investment options that are safer than others, for instance, T-bonds. Of course, you would only get big returns on riskier options.

Either way, it's better to have to deal with the possibility of losing one's investment, than the certainty of losing it (a la the current SS system).

[david]

"Most plans involve purchasing some kind of annuity upon retirement"

probably better than cashing out and keeping it under your mattress, but roughly the same idea. ok, that largely shields you from later fluctuations. it still does not, however, protect you from turning 65 in early 2001, when the market just tanked and won't recover for another two years, your employer is anxious to show you the door because they're cutting payroll as fast as they can, and nobody else will hire you because the streets just flooded with laid-off workers who have your same skill set and are younger.

social security was intended as a hedge. you can argue that people should have the right not to buy that hedge-- the liberal will argue that it hurts all of society when people make that bet and lose; and that's a classic libertarian-vs-liberal argument, i have no problem with seeing it again. but arguing that hedges are never necessary-- four years after a market crash that some expected to rival the great depression-- is just *strange*.

[Thomas Paine's Goiter]

That's not really the idea. Most plans involve purchasing some kind of annuity upon retirement that guarantees a minimum income, with any remaining funds above that level at the individual's discretion to cash out or continue investing.

If you look at the numbers, and I have done so exhaustingly, these ideas are so simple that it's frightening. All of the high-level arguments about this only serve to confuse people and muddy the waters.

Look at this simple example: a person that earns $30,000 a year with a wage adjusted 1.7% per year from age 22 to age 65. Take this person's complete SS contribution every year and place it in a Personal Retirement Account. Allow this person to diver that money to a variety of options, including Money Markets, CD's, Savings Accounts, Mutual Funds, Stocks, corporate bonds, annuities, federal treasury notes, and municipal bonds.

If this person were to see a yearly return of just 6.5% (which the employees of Galveston, TX who opted out of SS have in the last 20 years) this person, who only ever earned $30,000 in real wages, will retire with $1,075,000 in their retirement account. A guy that only ever earned $30k will retire a millionaire.

This is what we need to stress to people in these debates. Not privatization, not choice, not complication. Stress the fact that a married couple will retire with at least $1.7 million in the bank.

What they do upon retirement is up in the air. Annuity? Great. Start making monthly withdrawls? great. (another point that needs to be made is that this guy will be making monthly withdrawls that will be greater than his salary EVER was).

[PintofStout]

What they do upon retirement is up in the air. Annuity? Great. Start making monthly withdrawls? great. (another point that needs to be made is that this guy will be making monthly withdrawls that will be greater than his salary EVER was).

Why make it a government mandate to begin with? If I choose to save, I could win. If I choose not to and lose, who's fault is it? Why does the government have such a hard-on for the money I earn?

Financial education would go a long way toward solving the "choice" problem (not a cheap plug of the book). But our education system sucks as bad as our SS system...wait a minute...I think I see the problem. The government runs both of them. JUST GET RID OF THE GOVERNMENT!

That was simple.

[Jeff Smith]

Give him hell Julian!

To pintofstout: a forced savings scheme is
a moderate libertarian "second best" response
that acknowledges that we will never let old
people starve or go without a home. As some
people are improvident and others unlucky, the
real choice is between forcing them to save
for themselves or giving them means-tested
welfare, with all the bad incentive effects
the latter entails. I think a forced saving
scheme is the better of the two alternatives,
and it has the side benefit of increasing the
savings rate, rather than reducing it as the
SS system does. This increases investment
and thereby growth, making us all better off.

Jeff, avoiding a deadline.

[Gilbert Martin]

"social security was intended as a hedge. you can argue that people should have the right not to buy that hedge"

Social security is not a hedge - it's a transfer payment program.

" what exactly is dumb about fearing to subject one's retirement savings to market dips?"

I always find it amusing that the SS system apologists are always trying to characterize allowing people to keep and invest their own money in the stock market as "risky" and handing it all over to the government to be paid out to someone else or used to buy something else (the "trust fund" money) and depending on future politicians to not cut or eliminate their benefits as "safe".

[Gilbert Martin]

By the way, there is an interesting article over on National Review Online today by Bruce Bartlett that points out that the Medicare system unfunded liabiltiy is twice as large as that of the SS retirement system - $24.6 trillion vs $12.5 trillion - and it's growing a lot faster and more unpredictably too.

[Thomas Paine's Goiter]

Bartlett that points out that the Medicare system unfunded liabiltiy is twice as large as that of the SS retirement system - $24.6 trillion vs $12.5 trillion - and it's growing a lot faster and more unpredictably too.

Use my same plan for a Personal Health Account and that guy making 30k a year has 251k upon retirement for health insurance.

[Thomas Paine's Goiter]

And fund all of the shortfalls in the meantime with a tax on religion.

Nah - I kid.

[gaius marius]

the paradox thesis?more choice is actually bad, because our poor brains become overwhelmed by all the options.

this is a bit silly, but i'll argue all day that more choice is not a priori better outcomes.

mr goiter's decent analysis hinges upon this statement:

If this person were to see a yearly return of just 6.5% (which the employees of Galveston, TX who opted out of SS have in the last 20 years)

this suffers the error of projecting reductive recent past statistics into longterm future outcomes.

first, reductive: what is more true to say is that such employees garnered thousands of different returns that clustered around 6.5%. that is to say some lost 20% average annual -- others made as much. as mr joe is fond of saying, that isn't "security".

i'd be interested to see the distribution of returns, frankly. in my education and experience, what small investors are best at is selling bottoms and buying tops -- because human information processing is emotional and crowd-oriented. (sorry, rational individualists.) markets are extraordinary at destroying emotional capital.

second, recent past into longterm future: we're coming out of one of the great bull markets of all time. history indicates that the united states stock market will probably trade sideways to down for up to two decades henceforth. the dow high of 1929 was not surpassed until 1954. japan is 15 years on from 1990 and the nikkei sits at 1/3 its high. secular bear markets last a long time and wash out *everyone* -- indeed, the function of a bear is to eliminate all possible sellers through widespread irrational pessimism. this inevitably includes just about every small investor, after significant and repeated losses have taught them futility.

in fact, one of the signs that japan may have finally bottomed recently is the fact that virtually no japanese citizen will invest in the stock market. this is where america's petty-stock-speculation culture is on its way to, i'm afraid. some years from now, this whole idea will seem a horrid boondoggle to everyone. and that would be just the time to jump into it.

this is where the idea of a "hedge" comes in, although that is the wrong term -- socsec can provide a *low-risk* account that provides a minimal safety net.

this allows the individual with private savings to take greater risks with their private capital without being denied a safety net. it has functioned in this way for decades already -- retirement assets are already privatized.

for those who do not have that luxury, it provides subsistence.

so one has to consider what the effect of this policy change could be. it seems to me that if one allows individuals who need subsistence to take their low-risk capital and allocate it to high-risk (ie the stock market), one is hoping that they allocate a sufficient amount into low-risk alternatives. that hope will, in fact, in millions of cases be betrayed. and these millions will, in the end, be poorer -- not richer -- for having had this choice. people being what they are, they'll also probably be angrier.

[gaius marius]

depending on future politicians to not cut or eliminate their benefits

this of course is a different argument, which also implies that the removal of the safety net is a bad thing -- which i agree, it is.

responsible leadership would cut the hell out of the imperial budget and raise taxes until receipts roughly balanced outlays and reconcile social program promises to subsistence instead of luxury.

unfortunately in this respect, we live in an individualistic democracy -- which is generally the antithesis of fiscally responsible government.

[Dan]

this suffers the error of projecting reductive recent past statistics into longterm future outcomes

Social Security suffers from the error of believing that the United States government will be the first entity in the history of the world to make a Ponzi scheme profitable for all of its investors -- which will be quite a trick, since it's mathematically impossible.

You're also ignoring the fact that if the US economy takes a turn for the worse Social Security will collapse anyway when the tax revenue it relies on dries up. There is no possible circumstance under which the market will be a worse investment than giving your money to the government is.

the dow high of 1929 was not surpassed until 1954. and the nikkei sits at 1/3 its high

That's an absurdly dishonest way of looking at the market. You're acting as if a substantial part of a person's retirement investments would have been made at or near the peak, which is simply wrong. Short-term stock bubbles and crashes only help or hurt stock speculators -- they have no real effect on people making long-term investments over the course of decades, as retirement planners do, because only a tiny percentage of the total investment ends up being purchased or liquidated during the boom or bust period.

[Gilbert Martin]

"this of course is a different argument, which also implies that the removal of the safety net is a bad thing -- which i agree, it is."

I implied no such thing.

I made a statement about comparative risk.

Risk is all about probabilities. The point is that the ACTUAL level of risk that future politicians will cut or eliminate SS benefits no matter what current politicians (or anyone else) are saying about it now is at least as great or greater than the probablilty that a market based investment will not provide a sufficient rate of return to retire on.