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I was reading an article about the US proposal to cap credit card interest rates at 10%. As part of the piece, they interviewed a US woman in her thirties who had amassed over $6,500 in credit card debt paying for childcare AFTER she lost her job, apparently she decided to keep sending her kid to daycare so she could have some freedom. To me, this is an irrational financial choice.
Being a bit of a nerd on a wet Saturday afternoon with some spare time on my hands, I thought I’d poke around online and try to find other instances of irrational financial choices. Without further ado, I present a short compendium of head-scratchers for you to ponder.
When Winning the Lottery Means Losing Everything
William “Bud” Post won $16.2 million in the Pennsylvania lottery in 1988. Three months later, he was $500,000 in debt. He’d bought things like a restaurant and an airplane—neither of which he had any clue how to run. He ended up filing for bankruptcy.
Then there’s Evelyn Adams, who won the New Jersey lottery twice for a combined $5.4 million. Within a decade, she’d gambled and given away every single penny and was living in a trailer working two jobs.
The $20 Bill Nobody Wants to Lose
Here’s a fun psychology experiment: researchers auction off a $20 bill, but there’s a catch. If someone outbids you, you still have to pay whatever you last bid, you just don’t get the $20. Sounds crazy, right? People routinely bid well over $20 just to avoid the pain of losing what they’ve already put in.
Sunk cost was the reason. It’s the same reason people keep pouring money into beat-up cars that should’ve been scrapped years ago. Or what about this one? USC employee with five kids quit his job at 14.5 years instead of sticking it out for six more months to hit 15 years—which would’ve given all his children free university tuition. That six-month decision cost his family hundreds of thousands of dollars.
More Money, Less Coverage—Sure, Why Not?
In one study, people were willing to pay $14.12 for travel insurance that only covered terrorism but just $12.03 for insurance covering death from any cause. They literally paid more money for less protection because terrorism sounded scarier.
Just… Why?
One person bought trip insurance for their honeymoon, had a legitimate medical emergency that canceled the trip, confirmed they were covered for $5,000, and then just… never bothered to file the claim.
So What’s Going On Here?
Whether it’s racking up childcare debt while unemployed or lottery winners blowing through millions, the pattern seems to be the usual culprits: emotional decisions, inability to let go of money we’ve already spent, overestimating our abilities, and struggling to think past next week. I don’t feel too bad about paying $9 for a coffee the other day now!
An iron law of reality: frugal people never buy lottery tickets, so they never win.
Great review of the sunk cost fallacy! This is something we need to be reminded of regularly.
I think the sunk cost fallacy is one of the biggest drivers of poor financial decisions that most of us deal with. Like the 2005 Lexus RX330 I bought in 2019. I think I spent almost the purchase price on repairs, a new stereo (it came with a lousy aftermarket system so I put in one with bluetooth phone and Apple CarPlay), and then, last summer, after it was all fixed up with new tires, I gave it to one of my daughter’s best friends who badly needed a car. The young lady works hard as a nurse, didn’t come from wealth at all, and so could greatly benefit from it. Now, I get pleasure from hearing the car still works great and the young lady is really enjoying it. I don’t mean to be blowing my own horn here, just showing how the sunk cost fallacy can really work on a person when you get your emotions involved.
Mark, I’m more than a bit skeptical that there is a “pattern” in evidence with these colorful anecdotes. Do these examples happen? Of course they do, and people read about them and remember them forever (a couple of these stories are literally decades old). But nobody writes about people who make rational, reasonable financial decisions, like investing their lottery or contest winnings. They’re not fun or interesting, and their stories don’t wind up in the newspapers, destined to live forever online.
I would take some convincing to believe that the weird, quirky and stupid people who inhabit these hilarious stories are more than just a very small percentage.
Mike, I’m definitely cherry-picking in the article for effect, but consider this more mundane example: 25% of UK adults and nearly 50% in the US reach retirement age with zero savings. That strikes me as clearly irrational financial behavior by a substantial portion of the population. I’ll concede that wealth inequality accounts for some of this, but a significant percentage stems from spending choices made throughout life.
Mark, I used to believe the same. The last few years delivering Meals on Wheels have taught me otherwise. Yes, people do make bad decisions, financial and otherwise, but I’ve learned from listening to my clients that ill health and/or ill fortune are generally the most likely contributors to a desolate old age. Particularly in the US, where the social safety nets are full of very large holes.
Mike, thank you for your compassionate reminder that headlines aren’t the story. As a preteen, I used to deliver meals that my mother provided to a building across the street that housed people who were impoverished. Many of them had visible impairments. This had a lasting effect on me. I hadn’t thought of that period in my life in such a long time. It’s a memory worth having. Thank you.
Have you ever tuned into HGTV’s ‘My Lottery Dream Home’? The host, David Bromstad, takes recent lottery winners to go shopping for their ‘dream home’, which they can now afford to buy with cash from their good fortune. I can’t help but wonder if their normal income can support the new monthly expenses that come with owning a bigger home.
Dan, I’ve been a regular viewer of the show for ten years now. Enjoy it immensely. And what always strikes me is the sensibility of the home shoppers. They’ve had a $2 million win on a scratcher and want David to find them a house for no more than $350,000. I can’t remember more than one or two instances where I thought they were buying something on which they might strain to pay the taxes or upkeep.
You and Mike Wyant may be right; I actually hope that you are. Still, I can’t help but wonder.
I like the program, David is a hoot, and he shows the same enthusiasm for selling a house at $350k as he does for a house costing much more.
I’ve noticed the same thing. My guess is that there are guardrails in place where it has to be a financially rational investment so as not to promote irresponsible behavior. Maybe they get a little financial advice ahead of time.
I have read that while there are the well covered lottery winner death spirals, that most lottery winners are more circumspect and end up better off for the rest of their lives. At least I hope that is the case. But point taken, emotions drive a lot of financial lunacy.
A couple of decades ago I was in a medical office and picked up a copy of Newsweek to read. At the time, bashing the banks and credit card companies was in vogue and there was a feature article about the “debt crisis”.
One of the examples was a PhD candidate who was heavily in debt and had at the time also had about $25,000 owed to the credit card companies. Her lawyer explained that every time she received a credit card in the U.S. mail she treated it as “Free Money”.
And who can forget 2008’s “Occupy Wall Street” protests, in which college graduates with little real, marketable skill and questionable education marched in the name of fairness.
Today, nothing has changed except now colleges are teaching remedial math. The race to the bottom continues.
Mark, these are the people I have been inclined to rant about on occasion and widely criticized for doing so, but they are real.
There used to be a TV show about lottery winners. One I will never forget is the guy who bought a large property with a lake and then bought used construction equipment (bulldozers, trucks, cranes, etc,) to surround the lake just because he liked such stuff.
It’s well established that many lottery winners routinely blow their money in a short time.
I watch TV game shows and often the host will ask, if you win what will you do with the money? The answer is always something like, “I’m taking my entire family to Disneyworld. I have yet to hear, I’m putting it into my retirement fund or pay off credit cards, or save for college 🤑
My son was a contestant on jeopardy— did it to please my mother. The money he received helped pay for medical school. True, this is a sample of one, but I’m sure how the money was used.
Don’t you think there’s a reason for that? These contestants are thoroughly coached to deliver the maximum excitement to the audience. Glamor delivers excitement. 529s do not. So take what you’re watching with a grain of salt. More than a grain.
Your last line is exactly what I say to myself when watching such shows!!
And when they say what they will spend the money on, the host or hostess smiles approvingly and the crowd roars!
My local radio station runs a competition every Friday with a $500,000 prize. The DJs promote it relentlessly all week with the same mantra: think of the stuff you could buy, the holidays you could take. Never a mention of investing for the future. Just buy, buy, buy.
Does this mean they give away a million dollars every two weeks!?Just wondering how a local radio station can afford to give away so much money. 🤔
It’s one of those competitions where you phone a premium rate number to enter. Each Friday, they randomly call one of the registered numbers. I’d assume the whole thing is self-funded through the profit from those premium rate registration calls, plus all the times when the selected listener doesn’t answer the station’s call.
Well Mark, you have just discovered the American mentality.