Choice overload- When less is more


Imagine you are in a new coffee shop. There are 3 options: iced coffee, Americano and latte. What’s your choice?


Now imagine your choices are:Americano, Café Breve,  Cappuccino, Cortado,  Espresso, Latte, Café Mocha:, Cold Brew, Flat White, French Press Coffee Frappe, Macchiato


What’s your choice now? You might stick with your normal order, try something new or copy the guy in front of you in the queue. Regardless, you will definitely spend more time and energy making your decision. 

The second scenario has so much choice, it overloads our brain. When our brain is overloaded, we get tired and can make impulsive, rash decisions. 


Let’s look at how this affects traders. In trading, there is no clear path to success. It can seem every turn is filled with complicated choices that have a knock-on effect, and it is tough to determine what are the right choices with so many available. Furthermore, decisions can be very time sensitive, so traders are often not given a lot of time to mull them over.  

It might seem intuitively like having lots of choice is a good thing, but the opposite is true. When we are presented with too many options, we have what is called choice overload-we are overwhelmed with how many choices are available, and make objectively worse decisions.

This is because choice overload can cause a number of issues, including:


Decision fatigue: Our brains are amazing, but none of us are computers. Like the muscles in our body, our brain tires when we have to use it a lot. Think of it like starting with  full glass of water each morning, and with each decision we make during the day, we take a tiny sip of water. We then have to make hundreds of decisions during the way day (whether to snooze, what to wear, which coffee to get, how to get to work, which email to answer first, and all that is before 9.30AM!),  so by the time bedtime rolls around, we are often left with an empty glass. This mental fatigue can cause us to make ill-informed and rash decisions. If in the morning when we choose what products to trade in, we are more likely to weigh up the pros and cons and make an educated, rational choice. By the end of the day, the mental effect of choice after choice has tired us, and so we often take shortcuts with our decision making process, or just stick with what we’re already doing. 

No one is above this - no matter how rational we try to be, we can’t make decision after decision without paying a price.  Naturally, we get tired quicker if  for each choice to be made, there is numerous options available (like at the coffee shop). That takes more of our limited brain ability to process, so decision fatigue can set in much earlier in the trading day, causing a great amount of fatigued (and potentially detrimental) decisions to be carried out.  Our studies show that traders who stick to 5 products or less are 50% more likely to be successful as those who trade over 25 products.  Limiting the number of products and charts available for trading decisions can help minimize decision fatigue.

Status Quo Bias:People don’t like change, so we tend to stick with the same strategy we had already. Even when a direction becomes available that is more beneficial to us, the status quo bias makes us inert and we don’t make the change. Think of staying in a gym membership when you go once a year, or sticking with the same insurance year after year. This bias can be triggered by having too much choice available-we get overwhelmed and decide to go with the safe choice-what we are currently already doing. We know this option, and feel comfortable with it, so we choose to be safe rather than taking a risk. 


We’ve studied the behaviour of traders around the product they trade most often.  For 1 in 6 traders their most traded product shows significantly more negative returns than their other products.  For 1 in 8, it is actually their worst performing product.  You can read more about this phenomenon here <Marise – put in a link – placeholder to a blog saying “coming soon” so it can be updated later).   


We are more likely to change from our current position if we’re given a selected choice, say 3 options, because we feel we can better assess the pros and cons of all. 


The same can be true for our trade selection process. If we are using multiple sources of ideas or signals, we can overly rely on a default source without clearly understanding if it is the most viable option. 


If you find yourself reviewing a price chart with a large number of different indicators turned on, ATR, Fibs, trendlines, support and resistance lines, triangles, lots moving average etc, then you know exactly what we mean.


Deferring the choice:Sometimes when we have a lot of options available, we put off making a decision. We give our future selves the responsibility of deciding, so we can relieve our present selves of any stress. How many times have you said to yourself, “I’ll do that tomorrow” when faced with a complicated choice? This can have little consequences if the decision isn’t time sensitive. In trading, timing is key, so putting off a decision can have a big negative impact on a trader’s P&L.


Traders can sometimes defer the choice of closing a trade, because of this inertia described above,  If a trader does this a lot with losing trades, their disposition will be low.  They could be deferring the hard decision to take a loss, and instead 


To recap, having too much choice causes multiple negative consequences in our trading, but there are solutions to these biases:


Marise Gaughan