Study Links More Choice with More Risk

A Rutgers School of Business, University of Texas-Austin, and University of Pittsburgh study found that many employees without extensive investment knowledge will choose a heavier concentration of stocks in their portfolio when confronted with more fund options. A large fund menu more than doubled investment in stocks among those less knowledgeable, from 29% to 60%, and decreased bond fund allocation from 46% to 26%.

More investment options had no significant effect on people who said they had investing knowledge, according to a New York Daily News report about the study.

The Setup

The researchers asked 211 adults to select an asset allocation when given a choice between either three or 21 mutual funds. Those given the small investment menu were offered a single fund in the three asset classes: one stock fund, one bond fund, and one money market fund. The subjects presented with a large investment menu were offered seven funds in each asset class. The fund descriptions were based on actual funds available at Vanguard, but the brand identifying information was removed.

Those who described themselves as less knowledgeable investors allocated more resources to stock funds and fewer to bond funds when presented with more options than those who described themselves as more knowledgeable. The money allocated to money market funds was not different for either group.

The researchers said what they call the “menu effect” may be causing inexperienced investors to take on more risk than they are comfortable with or than they meant to, without being aware of it.

“Investors should be aware of the potential for the investment plan structure to sway their decisions,’ said Maureen Morrin, an associate professor of marketing at the Rutgers School of Business and a coauthor of the study, according to a press release. “They should have an idea of what type of balance among stocks, bonds and cash is appropriate before they look at a plan, so that the plan is less likely to influence their final allocation decisions.’