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

32 Pages Posted: 18 Feb 2011 Last revised: 9 Sep 2016

David Goldreich

University of Toronto - Rotman School of Management

Hanna Halaburda

Bank of Canada; New York University (NYU); CESifo (Center for Economic Studies and Ifo Institute)

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Date Written: January 8, 2013

Abstract

Are large menus better than small menus? Recent literature argues that individuals’ apparent preference for smaller menus can be explained by choosers’ 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 pre-select 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.

Keywords: menu, menu setting, choice, pension plans, 401(k)

JEL Classification: D01, G23

Suggested Citation

Goldreich, David and Halaburda, Hanna, When Smaller Menus Are Better: Variability in Menu-Setting Ability (January 8, 2013). Harvard Business School Strategy Unit Working Paper No. 11-086. Available at SSRN: https://ssrn.com/abstract=1763199 or http://dx.doi.org/10.2139/ssrn.1763199

David Goldreich

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-0833 (Phone)

Hanna Halaburda (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
20 Cooper Square 3rd Floor
New York, NY 10003-711
United States

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Munich
Germany

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