In an upscale grocery story, researchers set up a tasting booth first with 6 jars of jams, and later with 24 jars. In the first case, 40 percent of the customers stopped to taste and 30 percent bought; in the second, 60 percent tasted but only 3 percent bought. The point is that too many options can flummox a consumer - and if 24 jars of jam pose a problem, imagine what 8,000 mutual funds can do.
This seems understandable to me, but it can't be the whole story. If people want fewer choices, then why do grocery stores stock more items now than they did 20 years ago? Why do megastores like Home Depot or Wal-Mart crush their local competitors? If it were all about restricting the number of options, you'd think the world would settle on something that offers fewer choices. Wait a minute, maybe it has: CostCo is successful partly because they stock only one choice in each product category.