When Smaller Menus Are Better: Variability in Menu-Setting Ability

David Goldreich () and Hanna Halaburda
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David Goldreich: Rotman School of Management, University of Toronto, Toronto, Ontario M5S 3E6, Canada

Management Science, 2013, vol. 59, issue 11, 2518-2535

Abstract: Are large menus better than small menus? Recent literature argues that individuals' apparent preference for smaller menus can be explained by their behavioral biases or informational limitations. These explanations imply that absent behavioral or informational effects, larger menus would be objectively better. However, in an important economic context---401(k) pension plans---we find that larger menus are objectively worse than smaller menus, as measured by the maximum Sharpe ratio achievable. We propose a model in which menu setters differ in their ability to preselect the menu. We show that when the cost of increasing the menu size is sufficiently small, a lower-ability menu setter optimally offers more items in the menu than a higher-ability menu setter. Nevertheless, the menu optimally offered by a higher-ability menu setter remains superior. This results in a negative relation between menu size and menu quality: smaller menus are better than larger menus. This paper was accepted by Wei Xiong, finance.

Keywords: menu; menu setting; choice; pension plans; 401(k) (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (1)

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