Choice proliferation,simplicity seeking,and asset allocation

In settings such as investing for retirement or choosing a drug plan, individuals typically face a large number of options. In this paper, we analyze how the size of the choice set influences which alternative is selected. We present both laboratory experiments and field data that suggest larger choice sets induce a stronger preference for simple, easy-to-understand options. The first experiment demonstrates that, in seeming violation of the weak axiom of revealed preference, subjects are more likely to select a given sure bet over non-degenerate gambles when choosing from a set of 11 options than when choosing from a subset of 3. The second experiment clarifies that large choice sets induce a preference for simpler, rather than less risky, options. Lastly, using records of more than 500,000 employees from 638 institutions, we demonstrate that the presence of more funds in an individual's 401(k) plan is associated with a greater allocation to money market and bond funds at the expense of equity funds.     

ERODING MARKET IMPERFECTIONS,REINTERMEDIATION, AND DISINTERMEDIATION

In this paper a search model of a financial market, generalized to include costly contracting, is employed to demonstrate that: (i) relative cost efficiency for an intermediary is not sufficient to explain a role for intermediation services, and (ii) eroding market imperfections do not produce hypothesized effects on “reintermediation” from traditional depository-type intermediaries to brokerage-type intermediaries and on “disintermediation” from indirect financing to direct financing under a set of justifiable assumptions.