When Smaller Menus are Better: Variability in Menu-Setting Ability and 401(k) Plans — HBS Working Knowledge

When Smaller Menus are Better: Variability in Menu-Setting Ability and 401(k) Plans — HBS Working Knowledge: "When Smaller Menus are Better: Variability in Menu-Setting Ability and 401(k) Plans"

Executive Summary:

Economists love menus, which can be used to help understand people's choices. For example, do we prefer more choices (larger menu) or fewer (shorter menu)? But the menu itself has to be pre-selected. Research by David Goldreich (Rotman School of Management, University of Toronto) and Hanna Halaburda (Harvard Business School) focuses on the menu setter's decisions about what to include, and how large a menu to construct in the context of 401(k) plan choices. Key concepts include:

• When the cost of increasing the size of a menu is sufficiently small, a low-ability, or less skilled, menu setter will offer more items in the menu than a high-ability menu setter, who will be more discriminate in deciding which menu items to include.
• Combining the two results leads to a negative relation between menu size and menu quality: Larger menus are worse. This counterintuitive finding follows from the fact that the smaller menu set by the high-ability menu setter is not a subset of the larger menu set by the low-ability menu setter.
• One must be aware of the role played by menu setters in designing the menu offered to individuals. An unskilled menu setter may offer many choices, but the quality of those choices may be inferior.