Do you consider yourself calm and rational?  Cool under pressure?  Master of your domain?

Think again.

According to Harvard professor Gerald Zaltman we make 95% of our decisions emotionally and subconsciously.  It’s after we’ve made decisions that we try to rationalize them with logic.

Luxury goods are a prime example.  The manufacturers of luxury goods know this.  It’s why they sell the sizzle instead of the steak.

Consider the Toyota Avalon vs Lexus LS.  Same car from same company.  The logical buyer says the Toyota is just as roomy, is less costly to buy/maintain and has the same amount of space.  The emotional buyer focuses on the nameplate.

The marketing campaigns speak to the difference.  Toyota marketing is about cost, safety and reliability.  Lexus marketing is aspirational – speed, luxury and performance.

The investing world operates in a similar fashion.  Vanguard speaks to low costs.  Hedge funds and private equity promote exclusivity.

If decisions were logical and made consciously Vanguard would be the only investment shop in town and there wouldn’t be a single Lexus on the roads.

Consider how the logical/conscious vs. emotional/subconscious plays into performance expectations.  In rising markets increasing portfolios barely merit a yawn.  Good performance is expected.  Investment advisors add no value.  In down markets the emotional is triggered – anger, fear and resentment.  Investment professionals are fools.  They should have seen it coming.

There’s nothing wrong with emotion.  There’s nothing wrong with expectation.  There’s something very, very wrong with emotional expectations and using the gap between them and reality as “logical” basis for making changes to financial plans, asset allocation, tax strategy, etc.  Sometimes the best action is inaction.