Home / Opinion / Too much choice; too little help

That even smart people make dumb money mistakes is now fairly well established. We are not the Econ 101 textbook perfect economic agents who maximize utility with perfect calm, using all the perfectly disclosed information to make the most logical decision. Notice how you spend the next time you go to a mall and the textbook version of yourself goes out of the window. Look at your investment portfolio and the picture looks less and less perfect. Hammering away at this notion of perfect markets with perfect economic agents has been behavioural finance, which has used experiments to bring real life into economics. One of the tenets of economics that has got turned upside down has to do with choice. Is more choice always good?

I remember when Nirula’s in Delhi opened its ice cream parlour in the 1980s with a 24-flavour choice set, the buzz was no less than the launch of the next iPhone. From the ubiquitous orange bar or vanilla cup one ate to standing on tiptoe to peer at all the multi-coloured flavours was indeed a treat in a stuff-starved country. I also remember the hand-wringing angst of not being able to decide which one to get—there were simply too many options! Of course, I forgot all about that experience much later as a student of economics where I learnt that some choice is good, more choice is better. It seemed perfectly logical that more the choice, the better off the consumer would be. But increasing evidence from experiments shows that our brain tends to freeze after we see about eight to nine options for the same product or service. When faced with rows and rows of toothpaste, we tend to grab what we know and run. But when the product is not essential for everyday life, like a financial product is, we tend to put off the choice decision—we do not want to pick the wrong one and it appears safer to defer the decision. In fact, the participation rates in the US retirement product 401(k) drop from 75% when just two funds are offered to about 60% when there are 59 funds on offer (you can read the academic paper here: http://bit.ly/1wD9bFg).

Try buying an insurance plan or a mutual fund and most of us will freeze simply because there are too many options and we simply do not have the capacity to filter through each brochure. If we know that too much choice kills decisions, then we need to find a way to reduce the choice set. What you need to remember is this: there is no one perfect financial product. Your comfort with the kind of product and the company you buy it from is important.

A good way to filter out financial products is to look at online ratings and analytics because it is beyond the remit of an average individual to go through several thousand products and brochures, and zoom in on the one right product. You can look at the excellent ratings available online in India at Value Research and Morningstar. If you want a shorter list to choose from, you can look at Mint50 (http://goo.gl/SQbq9j), which is a list of investment-worthy funds put together by the Mint Money team. I know of investors who look at all three and then invest in products that make the cut in all.

But if you want to do the same in life insurance, you run up against a wall constructed by the Insurance Regulatory and Development Authority (Irda), which prevents any such use of the Internet. Read Section 12C of the IRDA (Web Aggregators) Regulations 2013 and it tells you, “Web aggregators shall not display ratings, rankings, endorsements or bestsellers of insurance products on their website...".

The use of third-party analytics is an important part of free markets and we see the regulator here using a hammer to crush this tool for an average investor to better choose a product. Read further and you understand that the most comparison-worthy of life insurance products—the unit-linked insurance plan (Ulip), because of transparent product structure—cannot be compared! Section 13 (d) lists the products that can be compared and Ulips are not a part of that list.

All right. This column was not supposed to dissolve into a rant against the insurance regulator, (do read this excellent piece by Nikhil Pahwa of Medianama on all that is wrong with the aggregator regulations of Irda http://bit.ly/1wD4Q6P), but each time I unpack Irda regulations, there is disbelief. Which regulator in the world has banned the use of social media by comparison sites? I thought banning of social media was the prerogative of dictatorial regimes. Or, maybe that is what we actually have with the insurance regulator in India. I wonder how this fits in with the digital drive of the new government?

So, what should you do if you want to reduce the choice set of insurance products? Till the analytics get better, just buy a term plan. How to choose? Look at online plans, premium rates and claims experience. For the claims experience, you’ll need to download the Irda annual report and look for the data. You can also get it in this story by my colleague Deepti Bhaskaran: http://bit.ly/1wGAFxc. Of course, if ratings were allowed, this would be online and searchable by now.

Monika Halan works in the area of financial literacy and financial intermediation policy and is a certified financial planner. She is editor, Mint Money, Yale World Fellow 2011 and on the board of FPSB India. She can be reached at expenseaccount@livemint.com

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