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How To Rapidly Go Broke
Falling for the sunk cost fallacy
Back in the 1980s there was a movie starring Tom Hanks and Shelley Long called The Money Pit.
They play a young couple without a lot of money who want to buy a house. A con artist convinces them to buy a beautiful mansion for a low price. It seems like unbelivable good fortune.
However, there is a saying about how if it looks too good to be true…
The young couple, unfortunately, are gullible. They don’t have the place professionally inspected before they buy the property. And it turns out to be a money pit — hence the name.
When they realize the house is falling apart, instead of cutting their losses and leaving, they keep sinking good money after bad. This money was the sunk cost, and their assumption that if they just kept going things would improve is the sunk cost fallacy.
There are several important lessons the movie teaches:
- Inspect before you buy. I always had a mechanic I trusted check a car before I bought, had a house inspected professionally, etc.
- If you are losing money (or time) don’t keep adding to the sunk costs
- People are emotionally vulnerable to the sunk cost fallacy; this is a universal human trait
