Having too many financial alternatives can be paralyzing

Dozens of drug-prescription plans. More than 8,000 mutual funds. Fixed-rate, interest-only and option ARM mortgages. Regular 401(k) plans vs. Roth 401(k)s. Countless flavors of bank accounts.

Choice is a hallmark of capitalism, and most of us would agree that having too many choices is far better than having no choices. A growing body of research, though, shows Americans have become so besieged by choices that many feel paralyzed and confused.

Having to choose one brand of jam out of 20 brands is one thing. But as Americans bear more responsibility for their own financial lives — from drug coverage to retirement savings — their decisions are looming larger than ever. At stake: their retirement, their health care and their children's education.

The problem is that many of us aren't up to making such decisions, says Barry Schwartz, a psychology professor at Swarthmore College and author of "The Paradox of Choice: Why More Is Less."

"This is just not a world for amateurs," Schwartz says. "The stakes are higher for things like health care and retirement plans than jeans or cereal."

The latest example: the Medicare prescription drug plan, which offers seniors in some states 50 or more plan options. Some seniors could save hundreds of dollars a year by signing up for the new benefit. And if they fail to join by May 15, they'll pay higher premiums in 2007.

Yet according to a November survey by the Kaiser Family Foundation, 37 percent of seniors don't plan to enroll in the plan. An additional 43 percent said they weren't sure.

Bill Bennett, 82, of Tacoma, Wash., says he could probably save money by signing up for the drug benefit because his current drug coverage through a Medigap plan is costly. But after trying to navigate the program, he gave up. He says it was "just impossible" to screen all the options and see which offered the best coverage.

The Medicare drug plan reflects a deeply held belief that choice is good, and that more choice is better, Schwartz says.

The problem with that idea, he says, is it's "empirically wrong." Faced with choice overload, people typically respond in one of three ways, Schwartz says. We freeze and make no choice. We make the wrong choice. Or we make the right choice but question our decision. "Even though you have no reason to be displeased, you're just sure you could have done better," Schwartz says.

Other areas where we risk choice overload:

Retirement