Investing Alphabetically – Seriously?
Where would we be without alphabetic order in our life? Imagine if airports listed all departures randomly on their flight boards? We might never make it to the gate.
But should you find your investments alphabetically? When you’re presented with a list of available funds, should you prefer the ones that appear toward the top of the list?
This is not a trick question. Of course, the answer is no. It shouldn’t matter one bit where a fund name falls on an alphabetic list. And yet, amazingly, a recent study found that many investors may be unintentionally allowing “alphabeticity bias” to creep into their decisions anyway.
The study, “Alphabeticity Bias in 401(k) Investing,” is slated to be published in a forthcoming issue of The Financial Review. Investment selections in 401(k) retirement plans are often presented in alphabetic order, so the study’s authors took a look at whether plan participants were allowing that order to influence their choices. They found that, indeed, “alphabeticity – the order that fund names appear when listed in alphabetical order – significantly biases participants’ investment allocation decisions.” The longer the list of selections, the more alphabeticity bias appeared.
Why would we do this? The authors proposed the reason is related to another bias they called “satisficing.” When you’re reviewing an alphabetic list of choices, once you’ve found one that suits your purpose, you tend to give less consideration to the rest of the list. “My work here is done,” your brain tells you, and it shuts down … even if there may be an even better selection further on.
You shouldn’t, and we won’t, settle for next-best investments – in your retirement plan or anywhere else. Helping you avoid doing so is one way we encourage you to Take the Long View® when you invest.