Irrational Financial Choices

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!