Your Role as a Choice Architect
publication date: Jan 15, 2024
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author/source: Brian Nelson, CFA
"As we've shown time and time again, you don't need to look far to beat the market return (or, by comparison, to have a healthy diet). If something is not on the menu at Valuentum, it means the chef has something better cooking in the kitchen."
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Dear members:
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Richard Thaler in his groundbreaking book Nudge (1), co-written with Cass Sunstein, talked about the role of the choice architect. A choice architect is basically someone or some organization that has the responsibility for organizing the context and content in which people make decisions.
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A good example of a choice architect might be a cafeteria worker that has to decide how to organize the food in a buffet line for students during lunch. Should the desserts be placed first or last? Where should the healthy foods like carrot and celery sticks go? Should the desserts be in a separate line altogether?
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What experimenters found is that cafeteria workers could impact the consumption of food items by as much as 25%, just by the way they were ordered. For example, if the cafeteria worker wanted to increase consumption of healthy options, they might be placed first in line. The important takeaway is that no matter what, the cafeteria worker, as a choice architect, influences the outcome. It is impossible to avoid some way of organizing the lunch options.
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Thaler and Sunstein talk about other choice architects in Nudge, too, including vote ballot designers, doctors in how they describe options to patients, health care and 401(k) enrollment plan designers, and parents in how they describe education options to their sons and daughters.
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Financial advisors are also choice architects, by default. For example, how you present investment options to clients might have a big effect on decision-making behavior. Do you want your clients to be active or passive investors? It might influence whether you talk about active funds or passive funds first during the selection process.
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The role of the choice architect is also unavoidable when it comes to organizing website content. For example, at Valuentum, we have a choice to put our newsletters front and center or elsewhere. We put them front and center. We want our members to do well, so we put our best ideas where they can be found the easiest, much like the cafeteria worker might put the healthy options of carrot and celery sticks at the front of the line. The newsletter portfolios have been great.
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We also have a choice of our coverage, whether to choose large cap stocks or small cap stocks, or something else, for example. More than a decade ago, we chose large cap as the primary emphasis. This choice indirectly may have impacted the outcomes of many members of our service, perhaps without them even knowing it. By some measures, large cap growth has significantly outperformed small cap value hundreds of percentage points since late 2009. If we'd done nothing else, this one choice alone may have put members in a fantastic position for success, almost by default.
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Image: Stocks in the category of large cap growth have significantly outperformed companies categorized as small cap value (orange) for more than a decade now.
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Over the years, we have made a choice to reduce the intensity of our coverage on some weaker companies, too (i.e. how frequently we update reports). For example, we wouldn't ever think of owning an airline stock (ever), so reducing the intensity of coverage on airlines made sense to us. Think of us reducing the intensity of coverage on a name or dropping the name outright, as removing or rather discouraging some of the unhealthy desserts from the menu.
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We don't want investors ruining their lunch with cupcakes and pastries, at the same time they could be considering healthy alternative options. In many ways, we hope members completely forgot that airline stocks even existed, when we reduced the intensity of coverage in November 2019. If they did, it would have saved them bundles by steering clear of their collapse during the COVID-19 meltdown.
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Whether we like it or not, most of us are choice architects. Some of our competition, for example, puts the cupcakes in front of the carrot and celery sticks, others arrange them randomly and put as much as they can on the table regardless of food quality, while still others just offer pastries and donuts based on popularity or the crowd. However, every research provider has to make a conscious decision, as each one is a choice architect with limited resources.
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At Valuentum, we can never provide personalized buy/sell advice, but in providing publishing services, we've opted for the healthy option for members, and that sometimes means you won't find a large selection of dessert options. This isn't a shortcoming of our service (i.e. we know desserts are tempting), but rather a key positive attribute. As we've shown time and time again, you don't need to look far to beat the market return (or, by comparison, to have a healthy diet). If something is not on the menu at Valuentum, it means the chef has something better cooking in the kitchen.
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Here's to your long-term financial health!
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Kind regards,
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Brian Nelson, CFA
President, Investment Research
Valuentum Securities, Inc.
brian@valuentum.com
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This article was originally published September 18, 2020.
Brian Nelson owns shares in SPY, SCHG, QQQ, DIA, VOT, RSP, and IWM. Valuentum owns SPY, SCHG, QQQ, VOO, and DIA. Brian Nelson's household owns shares in HON, DIS, HAS, NKE, DIA, and RSP. Some of the securities written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.
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