32 Pages Posted: 18 Feb 2011 Last revised: 9 Sep 2016
Date Written: January 8, 2013
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: 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