Choice and competition are two pillars of Australia's financial system and people feel entitled to choose from a wide range of competitively priced products. The problem is that choice is hard work.

Some people are prepared to drive across town and queue for an hour for discount petrol but many more will settle for the overpriced servo on the corner because it's convenient, even if they spend the rest of the week muttering darkly about price gouging. Such behaviour may be defeatist but it's understandable.

In a recent study by the Australia Institute, Choice Overload: Australians Coping With Financial Decisions, 42 per cent of those surveyed complained there was often too much choice when they had to make financial decisions.

Procrastination and irrational decision-making are often the result, including not planning for the future, relying too much on advertising, making "stab in the dark" decisions and not seeking out the right information. Others are simply paralysed into inaction, as a classic psychology experiment demonstrates.

In the experiment, two groups of supermarket shoppers were asked to sample jam. One group was given six jams to taste, the other group was given 24. Thirty per cent of the first group purchased something after the tasting, only 3 per cent of the second group made a purchase.

The report's author, Australia Institute researcher Josh Fear, says too much choice can provide the illusion of control but many people don't have the knowledge, skill or time to exercise control effectively.

Take managed funds as an example. Australia has the greatest number of managed funds per capita in the world.

According to Morningstar's Phillip Gray, there are almost 11,000 managed funds available in Australia, including 3432 trusts for general savings and investment, more than 4000 superannuation funds and nearly 3000 allocated pensions for retirement income. No wonder our heads are spinning.

"Competition and choice are healthy characteristics in the funds management industry," Gray says. "There does come a point though, at which choice begins to look like proliferation."

Similarly, investors who want to buy into the stockmarket are faced with more than 2000 listings.

Despite the recent bull market and high levels of share ownership, the study found that as many as a third of Australians who own shares did not actually buy them, or choose them, instead receiving shares as a result of a corporate restructure, through their employer or as a gift.

The problem of choice overload is not new and there is a growing awareness of its impact on consumers, thanks to the relatively new field of behavioural finance. The response to the problem from the finance industry and government has been to put resources into improving financial literacy.

Fear says this approach puts the responsibility for keeping up with changes "squarely on consumers," neglecting government and financial institutions' responsibilities "to present people with choices they understand and value".

The institute's study found about half of those surveyed agreed that financial investments and super are too complicated to understand properly. The results were similar for private health insurance and mobile phone contracts.

The desire for simplicity is partly responsible for the increasing popularity of index funds and exchange-traded funds that give investors relatively cheap access to an entire market or market sector. At their best, these can provide a set-and-forget investment for time-poor investors, provided they are diversified and held for the long term.

However, the fact that many of these funds are listed on the stock exchange is a temptation for investors to over-trade, as they hop on and off the latest bandwagon. This is not only expensive because of transaction fees but it might also lead to a costly lack of diversification.

Gray says investors should avoid rushing into the latest trend, such as funds based on a handful of Chinese stocks, water or climate change. "Asset allocation is the key for investors, and that leads to product selection," he says.

Ross Clare, research director at the Association of Superannuation Funds of Australia, says the industry's response to investor inertia is the default fund.

Employers are required to provide a default fund for the average investor with a medium-risk tolerance. Also, most super funds have a default option and many have default insurance cover, which members can top up or leave.

"In a complicated area such as super, people won't normally make decisions unless there is a big life event, such as changing jobs, retirement or having a family," Clare says. "The whole super industry works on the premise that fund members will not make decisions on important aspects [of their investments]."

Linda Elkins, managing director of super at Russell Investment Group, says research has identified three types of super members: the do-it-yourself types who feel they have the knowledge to make choices; those who have access to financial advice and can afford it; and the vast majority who rely on the default investment process.

Elkins says most funds have a 70-30 balanced option - 70 per cent growth assets such as shares and property and 30 per cent fixed interest and defensive assets - as the default. "This has delivered 8 per cent per annum after tax for the last 10 years, so the system has served us well," she argues.

Even so, she believes the super industry can do better. At present, most funds have only one default option with a one-size-fits-all asset allocation.

Elkins, who sits on the Federal Government's Financial Literacy Foundation, predicts we may also hear more from the Minister for Super, Nick Sherry, on improving defaults and opting-out provisions.

Like it or not, choice is here to stay but the future of choice could be the freedom not to choose.