Media Releases

Less is more when it comes to investment choices, says new study

April 30, 2013

TORONTO, ON – The best invest­ment port­fo­lios are select­ed from the widest array of choic­es, right?

Not so, says a new study authored by researchers at the Uni­ver­si­ty of Toron­to’s Rot­man School of Man­age­ment and the Bank of Cana­da. It says that a short­er “menu” of options is often bet­ter than a longer one. That’s because “menu-set­ters” who devel­op short­er lists have supe­ri­or selec­tion skills, on aver­age. The con­clu­sion goes against find­ings in oth­er research sug­gest­ing that more choic­es lead to bet­ter out­comes.

“Skilled menu-set­ters will put togeth­er a short­er menu because they will hit on the most impor­tant fea­tures, but less-skilled menu-set­ters, know­ing that they’re less-skilled, will put togeth­er a longer menu, just to cov­er all of their bases,”  says David Gol­dre­ich, a  finance pro­fes­sor at the Rot­man School who co-wrote the study with Han­na Hal­abur­da of the Bank of Cana­da.

Pre­vi­ous research has already iden­ti­fied that peo­ple often pre­fer short­er menus. The two researchers decid­ed to find out if there was an objec­tive rea­son behind that.

Using math­e­mat­i­cal mod­els and analy­sis of U.S. pen­sion plans in 2007 from 300 orga­ni­za­tions, they found that short­er lists of avail­able invest­ment options proved to be of high­er qual­i­ty than longer ones. The researchers used a com­mon­ly-used mea­sure­ment called the Sharpe ratio to eval­u­ate the qual­i­ty of the invest­ment choic­es avail­able to the orga­ni­za­tions’ employ­ees.

Although the paper focus­es on pen­sion plans for its exam­ple, its find­ings can be applied to oth­er sit­u­a­tions where a “menu” of choic­es is offered, whether that’s finan­cial options or even a restau­rant menu.

“The larg­er les­son we want to give is, when you are eval­u­at­ing menus, don’t just think about the menu. Take a step back and think about the incen­tive of the per­son who put togeth­er the menu,” says Prof. Gol­dre­ich.

The study will be pub­lished in a forth­com­ing issue of Man­age­ment Sci­ence.

For the lat­est think­ing on busi­ness, man­age­ment and eco­nom­ics from the Rot­man School of Man­age­ment, vis­it

The Rot­man School of Man­age­ment at the Uni­ver­si­ty of Toron­to is redesign­ing busi­ness edu­ca­tion for the 21st cen­tu­ry with a cur­ricu­lum based on Inte­gra­tive Think­ing. Locat­ed in the world’s most diverse city, the Rot­man School fos­ters a new way to think that enables the design of cre­ative busi­ness solu­tions.  The School is cur­rent­ly rais­ing $200 mil­lion to ensure Cana­da has the world-class busi­ness school it deserves. For more infor­ma­tion, vis­it


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Ken McGuf­fin
Man­ag­er, Media Rela­tions
Rot­man School of Man­age­ment
Uni­ver­si­ty of Toron­to
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