Investing for Retirement : The Moderating Effect of Fund Assortment Size on the 1/N Heuristic

Does the number of funds offered in your defined contribution plan affect how many funds you choose to invest in or how you spread dollars across the funds you choose? Across three experiments and the analysis of defined contribution plan data, we explore these issues by examining investors' tendency to engage in the 1/n heuristic ndash; allocating their dollars evenly across all available investment options (Benartzi and Thaler 2001). We decompose this heuristic into its two underlying behavioral dimensions: the tendency to invest in all available funds (which we label 1/n#) and the tendency to spread the invested dollars evenly across chosen funds (which we label 1/n$). We argue that choosing from larger fund assortments taxes investors' cognitive resources, which leads to more simplified diversification strategies. We find that increasing the fund assortment size decreases the tendency to invest in all available funds (1/n#), but increases the tendency to spread the invested dollars evenly among the chosen alternatives (1/n$) ndash; provided that the number of funds chosen for investment allows for easy equal dollar allocations. We integrate our results with prior research regarding asset choice and allocation heuristics