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Choice Regimes
By Brian Portnoy,
Author of The Investor's Paradox: The Power of Simplicity in a World of Overwhelming Choice

We're all familiar with the consequences of "choice overload," whether we're walking through the grocery store, comparing mobile phone plans, flipping through satellite TV channels, or surfing the web to purchase a garden gnome (a Google search produces about 3.8 million results). Indeed, we live in a time of unprecedented availability. In other words, what I call "choice regimes" evolve.

Let's point to three primary qualities of choice regimes: volume, complexity, and breadth. The first is the number of choices themselves, a somewhat obvious feature (e.g., 6 versus 24 jams; 3 networks versus 300 satellite channels; 1 pension plan versus 20 choices in our 401(k); etc.). The second is the dimensionality of each choice. Objects might have fewer or more features that make the latter a more "complex" choice (e.g., bicycles versus cars; cell phones versus smartphones; mutual funds versus hedge funds, etc.). The third is the number of choosers themselves. How inclusive is the regime? It could pertain to just a few individuals, or most of the planet.

We are experiencing an inflection point in choice regimes across most areas of modern life. At home, the deregulation of utilities has exploded our choice set in how we receive power, gas, and telecommunications services. In health care, the medical industry now compels us to make unprecedented choices among procedures and doctors. We are pelted with print and broadcast advertisements for prescription drugs that we couldn't purchase for ourselves even if we wanted to, yet suddenly recognize as possible solutions for potential problems. In education, the mandatory assignment to the neighborhood school has been replaced by a lattice of magnet, gifted, charter, parochial, and other private alternatives. And most obviously, in mass consumption, the number of immediately available goods is now countless, whether it be books, music, clothing, or garden gnomes. The Internet and other modern forms of communication don't just facilitate the trend; they help create it.

Most affluent societies have transformed into do-it-yourself cultures where more options are no longer just desirable -- they're mandatory. It's no surprise that researchers refer to "decision fatigue," the physical and mental exhaustion many people report from having to make so many decisions so frequently. Yet we would be disconcerted if our choice sets suddenly reverted to those available a generation ago. (Three TV networks, anyone?) Regardless of your personal feelings about whether "more is less" or "more is more," the left side of that equation is now fixed. There's no going back.

The Investor's Paradox

The choice regime for investments mirrors what we see in consumer goods, health, education, and elsewhere. Set aside the directly purchased securities -- stocks and bonds, mostly. There are countless tickers to choose from, but only a small fraction of us are trained to choose at that level. Most of us buy funds, not securities. We hire experts who themselves can purchase and assemble these securities for us. But then screen for "five star" funds on Morningstar, shop on the platforms at Schwab or TD Ameritrade, or attend (if permitted) a hedge fund "capital introductions" conference in which hundreds of allocators mingle with hundreds of portfolio managers. You'll be quickly overwhelmed.

Hence what I call the investor's paradox: We crave abundant investment choices to meet daunting portfolio problems in a world of volatile markets, manic news flow, and shifting geopolitical rhythms. But the more choices we are afforded, the more overwhelmed, less empowered, and ultimately less successful investors we potentially become. More is less.

Unfortunately, it gets worse. A generational stretch of nearly uninterrupted prosperity has recently yielded to an era of heightened uncertainty and economic stress. Fixed-income securities are vulnerable in a low-interest-rate environment like our current one, and equities are unpredictable. Because complex times prompt us to seek complex solutions, investors have increasingly gravitated toward experts with extensive tool kits and flexible modes of thinking over those who are tightly constrained or who bet only that markets climb upwards over time. The deeper, more insidious level of our investor's paradox is that the more adaptable, creative experts are also the ones more likely to disappoint because we automatically expect more from them. In the theory of choice, unmet expectations trigger powerful emotions. When expectations and outcomes don't match, disappointment ensues. And because drawing clear expectations for flexible experts is much harder than it is for those with tighter constraints, the chance the former can satisfy is low.

The above is an excerpt from the book The Investor's Paradox: The Power of Simplicity in a World of Overwhelming Choice by Brian Portnoy. The above excerpt is a digitally scanned reproduction of text from print. Although this excerpt has been proofread, occasional errors may appear due to the scanning process. Please refer to the finished book for accuracy.

Copyright © 2014 Brian Portnoy, author of The Investor's Paradox: The Power of Simplicity in a World of Overwhelming Choice

Author Bio
Brian Portnoy, Ph.D., CFA,
author of The Investor's Paradox: The Power of Simplicity in a World of Overwhelming Choice, has been successfully researching, advising, and investing in hedge funds and mutual funds for the past fourteen years. He is currently the Head of Alternative Investments and Strategic Initiatives for Chicago Equity Partners, a $10 billion asset manager. Previously, Brian held senior roles at Mesirow Advanced Strategies and Morningstar, the world's premier research shop on mutual funds. He has spoken at numerous investing conferences across the U.S., Europe, and Asia, and has appeared frequently in major media outlets such as CNBC and the Wall Street Journal. Prior to his investing career, Brian pursued his research and teaching interests in political economy and markets at the University of Chicago, where he earned his Ph.D. in 2000. Brian is a CFA Charterholder and a member of the CFA Society of Chicago.

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