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

Management Science 59, no. 11 (2013): 2518–2535

32 Pages Posted: 17 Mar 2012 Last revised: 4 Jul 2019

See all articles by David Goldreich

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)

Multiple version iconThere are 2 versions of this paper

Date Written: December 14, 2012

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 (December 14, 2012). Management Science 59, no. 11 (2013): 2518–2535. Available at SSRN: https://ssrn.com/abstract=2023956 or http://dx.doi.org/10.2139/ssrn.2023956

David Goldreich (Contact Author)

University of Toronto - Rotman School of Management ( email )

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Hanna Halaburda

Bank of Canada ( email )

234 Wellington Street
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Canada

New York University (NYU) ( email )

Bobst Library, E-resource Acquisitions
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New York, NY 10003-711
United States

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

Munich
Germany

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