Question of the Day: When choosing from a list of 401(k) investment options, which tend to be chosen most frequently: those investments starting with the letter C, letter M or the letter Z?
Answer: The letter C
- Why do you think that investments with the letter C might be selected more frequently than the investments starting with the other letters?
- What does your answer to the previous question say about human nature when it comes to challenging decisions with lots of options?
- How can you overcome this alphabeticity bias?
- Think of a decision that you recently made that had lots of choices (meals, career choices, colleges, classes to take). Describe your decision-making process and how you tried to simplify the process.
Behind the numbers (Alphabeticity Bias in 401(k) Investing):
Using a proprietary database of 401(k) plans we show that alphabeticity – the order that fund names appear when listed in alphabetical order – significantly biases participants’ investment allocation decisions. While we show a larger impact as the number of funds in the plan increases, this bias is strong even when relatively few funds are available in the plan menu. Importantly, our findings suggest that a more strategic ordering of funds could result in favorable outcomes for participants.
Looking for more investing resources, be sure to check out our Investing Unit page.
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.
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