In 1975, Pepsi announced the “Pepsi Challenge.”

For decades, Pepsi had tried to devise creative ways to surpass Coca-Cola in market share. This time, Pepsi turned to a simple blind taste test.

And at shopping malls across the country, Americans delivered a resounding verdict: Pepsi tastes better than Coke.

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If only our financial decisions could work like the Pepsi Challenge.

No context. No peer influence or status implications. Only one variable, like sweetness, to consider.

When we strategize about our finances, we often act as if this is possible. And understandably — many of the financial guides in our lives imply that we can replicate these conditions.

On social media, at work, and even in conversations with family, we’re counseled like Pepsi Challenge participants. Like we don’t face tradeoffs. Like we don’t have competing priorities. Like we don’t, in the back of our minds, think about keeping up with friends and neighbors.

The advice we typically hear suggests it’s only about sweetness.

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In personal finance, “sweetness” takes many forms. In recent years, highly-speculative investment fads such as meme stocks, crypto coins, and NFTs have served as particularly saccharine examples.

More commonly, though, the financial equivalent of sweetness applies to many well-intended tips:

• “Always max out your retirement accounts”
• “Buy a house as soon as possible, rather than renting”
• “Invest in one or more rental properties”
• “Pursue every possible tax break”
• “Save for the full sticker price of college”

As in the Pepsi Challenge, many of these tips only hold up when considered in isolation.

In personal finance, context matters. Status pressure is real. And our financial lives are full of different variables.

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Soon after the Pepsi Challenge ads ran, the underdog began to outsell Coke in supermarkets.

Coca-Cola executives panicked.

They decided that they needed to make a change. Very quietly, the company began internal experiments. They wanted a new recipe for Coke. They wanted their soda to taste sweeter than Pepsi.

The product they ultimately devised proved more popular than both Pepsi and the original Coca-Cola in private, blind taste tests.

So on April 23, 1985, New Coke debuted. In fact, New Coke entirely replaced the original Coca-Cola on shelves.

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Matthew Yglesias, in a 2013 Slate article, describes what happened next:

“The backlash was fast and furious, with over 400,000 letters of complaint pouring in to the company.… Pepsi recorded the fastest year-on-year sales growth in the company’s history during New Coke’s first month, while a consortium of Coca-Cola bottlers decided to sue the company for changing the product.”

What did Coca-Cola get so wrong?

Yglesias argues that “the company’s millions of loyal customers weren’t looking for a new flavor.” And as journalist Barbara Mikkelson elaborates, it turns out that sweetness isn’t consumers’ only consideration:

“Long before they’d tasted a sip of it, millions of Americans had decided they hated New Coke. Yes, in blind taste tests people had consistently said they liked the new formula better. However, a soft drink is so much more than merely its flavor; a soda is also its marketing. Coke had spent more than a hundred years convincing the North American population that its product was an integral part of their lives, their very identities. Taste be damned: to do away with Coca-Cola was to rip something vital from the American soul. Americans (never ones to peaceably go along with anything perceived as violating their identity) weren’t going to stand for it, and they weren’t shy about saying so.”

Donald Keough, then Coca-Cola’s president and chief operating officer, added:

“The simple fact is that all the time and money and skill poured into consumer research on the new Coca-Cola could not measure or reveal the deep and abiding emotional attachment to original Coca-Cola felt by so many people . . . It is a wonderful American mystery.”

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Only 79 days later, Coca-Cola pulled New Coke from stores.

In doing so, Coca-Cola acknowledged — with admirable speed and decisiveness — that the company had made a mistake. They had miscalculated the central role that context plays in our decisions.

In our financial lives, we often disregard context as much as the executives who pushed for New Coke. Too often, we:

• Don’t filter out generalized guidance that doesn’t apply to our own finances;
• Forget that most “optimal” financial decisions don’t factor in the tradeoffs we face;
• Disregard how our health and time limitations should influence our financial choices.

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In the real world, in their daily lives, most people think Coke tastes better than Pepsi.

Psychiatrist Scott Alexander says, “Think of it as the brain combining two sources of input to make a final taste perception: the actual taste of the two sodas and a preconceived notion (probably based on great marketing) that Coke should taste better.”

The money challenge that we encounter each day demands that we do the same. We need more than calculations that, in theory, might maximize our wealth.

We also need context.

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About the author: Kevin Mahoney, CFP®

Hi, I’m Kevin. I’m a financial advisor in Washington, DC. I’m also the founder of Illumint, an independent financial planning company in the District that specializes in financial planning for Millennials like you. I empower our generation with the confidence to invest an inheritance, financial gift, or extra savings. If you’re new to Financially Well, welcome – you now have access to the leading finance podcast for Millennials. I encourage you to read, watch, or listen to the ideas I’ve shared about making your money work for you. And then when you’re ready, please send me your thoughts & questions!