Asset Allocation and Information Overload: The Influence of Information Display, Asset Choice, and Investor Experience

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Abstract
This paper examines whether information overload might partially explain why de- fined contribution plan participants tend to follow the "path of least resistance" (Choi et al. (2002)) In two experiments, we test how three common differences among defined contribution plans (the number of investment choices offered, the similarity of the choices, and the display of the choices) lead to varying degrees of information overload and the probability of opting for the default. Notably, we control for the fi- nancial aptitude of each individual. The findings suggest that the success of certain plan features depends strongly on the financial background of the participant. We find that low-knowledge individuals opt for the default allocation more often than high-knowledge individuals (experiment 1: 20% versus 2%). The results emphasize the importance of plan design, especially the selection of plan defaults, and the need to improve the financial literacy of participants.