“After the Enron collapse, the U.S. Congress is debating whether to limit the amount of their own company’s stock that employees can put into their 401(k) retirement plans,” writes Hal Varian in today’s New York Times.

“Those in favor of such caps, like Senators Barbara Boxer and Jon S. Corzine, see them as a way to encourage diversification and reduce risk. Those opposed, like Labor Secretary Elaine L. Chao, say such caps violate freedom of choice.”

“Economists generally believe that more choice is better, but even economists acknowledge that there are plenty of exceptions in real life. Offering a cigarette to someone trying to quit smoking, a drink to a recovering alcoholic or a candy bar to a dieter isn’t doing that person a favor.”

“To most economists, the problems illustrated by these examples are anomalies. But to one group, behavioral economists, the examples are central.”

“Clearly, more choice is not better when people have problems with self-control. Behavioral economists have also identified several other reasons that more choice can make consumers worse off, reasons that affect everything from marketing strategy to pension policy.”

“Start with marketing.”

“Two researchers, Sheena S. Iyengar and Mark R. Lepper, set up sampling booths for jam in a supermarket. One offered 24 flavors, and one offered only 6. More people stopped at the larger display, but substantially more people actually bought jam at the smaller display.”

“More choice seemed to be attractive to shoppers, but the profusion of choices in the larger display appeared to make it more difficult for the shoppers actually to reach a decision to buy.”

“Shlomo Benartzi and Richard Thaler, two behavioral economists, wondered whether the same problem with ‘excessive choice’ showed up in investor decisions. They found that people who designed their own retirement portfolios tended to be just as happy with the average portfolio chosen by their co-workers as they were with their own choice. Having the flexibility to construct their own retirement portfolios didn’t seem to make investors better off.”

“In some investment situations, more choice can be downright dangerous. Two finance professors, Brad Barber and Terrance Odean, studied the performance of 66,465 households with discount brokerage accounts. Households that traded infrequently received an 18 percent return on their investments, while the return for the households that traded most actively was 11.3 percent.”

“In the words of Mr. Barber and Mr. Odean: ‘Trading is hazardous to your wealth.’ “

“In later work, these financial economists investigated who it was that traded too much. They found that one important determinant of excessive trading was gender.”

“Psychologists consistently find that men tend to have excessive confidence in their own abilities, a fact that will come as no surprise to most women.”