Alright, this article hurts me to write. I’m waiting for the keyboard to start burning my fingers because it is so against what I like to believe. Yes, I have to write I’m not as logical as I think I am. Man, that hurt. The good news is I’m not alone, because you’re not as logical as you think you are either.
I’ve been reading a great book named Alchemy by Rory Sutherland. The complete title is Alchemy The Dark Art and Curious Science of Creating Magic In Brands, Business, and Life. I’ll just stick to calling it Alchemy for short. Now, you know I’m a big fan of reading books from the library. Every so often I borrow a book and decide it is worth me buying. I made the decision to buy this book about 5 pages in.
I haven’t yet finished the book, but thought I would share the premise and some interesting findings. The premise is simply we are not as logical as we claim to be or want to be and how it is important to spot where universal laws do not apply. Let me share some of his findings:
- A beverage company decided it wanted to reach beyond its home country to try and break into the international market. They hired a research agency to gauge consumer reaction through taste tests. The results were this product had the worst scores ever tested. Despite the awful feedback the company still went international. Red Bull now sells 6 billion cans annually.
- A research company sent out 4 sets of 100,000 letters each for donations to a charity. Each of the 4 sets had a different approach. One was delivered by volunteers. Another was in higher quality envelopes. A third offered a 25% tax rebate with a donation. The final 100,000 were in a portrait envelope instead of the traditional landscape one. All but 1 of the 4 sets saw a 10% increase in donations. The most logical one, the 25% tax rebate, saw a 30% decline in donations. WHAT?!?
- When in doubt include cute animals in your marketing. Rory had a customer offer a drawing where the winner could get free energy for a year. The prize’s value was over 1,000 pounds (company in England) and they received 67,000 entries. They had another drawing where you could win a penguin nightlight (value of 15 pounds) and it received 360,000 entries. I mentioned this to my wife who agreed with it. Disclaimer – if you want to get her to laugh show her a video of an animal talking like a human.
While we all like to think of ourselves as highly rational and logical people, reality says we aren’t. Let me share a quick example. I was out recently with some friends grabbing an adult beverage and we saw a Lamborghini parked at the business. The roads in the greater Akron area are absolutely terrible and our weather certainly doesn’t allow for year-round driving of that kind of car. Yet, there it sat. Ready to drive home and hope not to have to cross any railroad tracks because its ground clearance wouldn’t win.
My practice is another perfect example. Let’s say my average client has investable assets of $1 million. The average advisor would cost them roughly $20,000 a year. Half going to the advisor and the other half to high-cost investment companies. That same client would pay fees of about $5,800 with me ($4,800 to me and $1,000 to low-cost index fund companies). Logic would tell you clients would rather keep that extra $14,200 a year in their own accounts instead of paying high fees, but many people think paying higher fees means getting better investment results. Unfortunately, the reality is the opposite usually happens as high fees frequently hurt returns. Yet people continue to flock to high-cost brokers and then wonder why the broker has a yacht but they don’t.
So, the next time you are making a decision and wonder whether it is 100% based on logic, remember that sometimes decisions are made with a healthy dose of alchemy and it’s okay. Because not everything can be explained by universal rules. And if you doubt me, Google why bicycles work. Seriously.