Ask almost any investor if they try to minimize taxes, and they’ll probably say yes.

Even here at Betterment, our mantra is:

Maximize clients’ returns, net of risk, fees, time, taxes and behavioral mistakes.

But there’s a point of diminishing returns—or false economy—when the quest to avoid taxes on your income or investments becomes a determined tax aversion that costs more than it’s worth.

In fact, a 2011 study by two colleagues of mine indicates that many people get so focused on avoiding taxes, and keeping that burden as low as possible, that they actually sacrifice higher potential net-of-tax returns.

### Blinded by taxes

Abigail Sussman, professor at the University of Chicago, and Christopher Y. Olivola of Carnegie Mellon found plenty of evidence of irrational tax aversion across a number of experiments—including a willingness to wait longer for a tax-related discount (versus an identical discount that wasn’t tax-related), and a preference for a tax-free bond over one where the yield was taxed, even though the net gain was the same.

In the first instance, we all know that time is money, yet people were willing to “pay more” in time spent waiting for a tax-related discount, compared to a non-tax-related discount of equal value.

The researchers set up two sales for unwitting shoppers: one billed as a “sales tax holiday”, and another just a sale for exactly the same percent discount. The median respondent was willing to wait 26 minutes for the non-tax discount, but 32 minutes for the tax-related discount, of equal value. So the participants seemed willing to “pay” with more of their time to get around paying something that involved the word “tax”—even though it wouldn’t result in additional savings.

Another example is relevant for investors who attempt to avoid taxes by having municipal bonds in their portfolio.