6 Logical Fallacies That Cost You Money Every Day
#3.
Throws Good Money After Bad
The competitive instinct is not just a phrase football commentators invented to give words to the tingly feeling they get watching Brett Favre play football. Our brain's natural tendency towards competition is arguably the reason your family survived the hunter gatherer knife fight of 2000 BC.
And as countless uninspired armies and poorly coached teams have demonstrated throughout the years, your ability to compete tends to be directly proportional to your ability to convince yourself that you're doing the right thing. This leaves us with a brain that loves to compete, and is awesome at convincing itself that it's right.
In the financial realms, when these two instincts collide, your brain will play a retarded game of chicken with reality that economists have termed "irrational escalation of commitment".
This applies to more than finances
As we've already established, when faced with the prospect of a $3,000 repair on your shitty car, or purchasing a slightly less shitty car for $2,500, your brain will tell you to go with the repairs because you "already sunk ten grand into the shit box." (Yes, we just quoted your brain. It talks like a little girl. Deal with it.) But what happens the next time your car needs a repair? Well thanks to something behavioral economists have termed post-purchase rationalization, your brain will have convinced itself that the last decisions was a great idea. And since you've now sunk 13 grand into the shit box, it's going to seem like an even better idea to keep piling up the bad decisions.
Throw in a little competitive instinct and pride, and it's not hard to see how this can go horribly, horribly wrong. Your brain will keep pushing your head further and further up your ass, piling up bad decisions with the ferocity of a rabid Glenn Beck.
The real world implications are everywhere, and tragic. For instance, it can justify escalation of a war. In 2005 America's President said that we "owed" the 2,000 American soldiers who had died in Iraq to "finish the task that they gave their lives for." Regardless of what your politics were, to a certain part of your brain, that sounds like a logically constructed argument. Why do these men have to die? Because these other men died, of course! And only the deaths of these additional men will cause those first men to come back to life!
After all, what else can we do, cut and run?
#2.
Has No Idea What Money's Worth
It turns out your brain is really, really bad at understanding that a $20 and twenty $1 bills are the same thing. That's why entertainment venues from strip clubs to arcades make you use tiny denominations: they know you'll spend a lot more. This is called the denomination effect, and while it'd be easy to claim that this is because we "lose track" of how much we're spending when we've got a gangster role of Washington's in our fist and some titties in our face, the study that coined the term says differently.
The scientists conducting it just gave two sets of (presumably confused) people either a $5 bill or five $1 bills and watched as the people with the fives held on to them while the folks with the ones, who had no titties in their face or time to lose track of the money, splurged on Jerky and trail mix.
This leads scientists to the depressing conclusion that your brain basically views the amount of money you make as a number, instead of what that money can actually buy.
This is called the money illusion, because in reality, your money is only as good as what it can buy. If you've got twenty dollars in your wallet, you should be thinking of it in terms of what it can buy you: Four beers, or two movie tickets, or a blowjob from any cast member of "The Facts of Life". But that's a lot of shit to keep track of, so your brain prefers to just stick with the number, and assumes a higher number means more beer and orgasms.
Which is important, as shown in the official USDA Man Pyramid
Of course that's not always the case. Your boss can give you a two percent raise in a year when inflation is expected to be four percent. But because your brain isn't built for complex concepts, you'll be thanking him as you and your family eat your breakfasts out of a can of Bush's.
#1.
Sucks at Figuring the Odds
In the olden days, your brain wasn't punished for locking in on some detail, and assuming it had some significance that wasn't there. Worst case scenario, you spent a few winters worshiping at the altar of the sun God, and sacrificing the kid who was born funny looking. These days there are people who know that we're all pattern seeking creatures who will look at a man winning money while wearing purple pants and go out and blow all of our money on purple pants.
As we've mentioned before, your brain sucks, and sucks hard, at probability. But there are all these wonderful ways in which, in the face of odds that makes the rational part think "This isn't such a good idea", the rest of your brain rams the pedal to the medal right into the brick wall of stupid.
There are two that really screw you in regards to that lottery, though: the gambler's fallacy and the focusing effect.
The gambler's fallacy is the belief that short term actions have an effect on long-term odds. You see the roulette ball fall into red three times in a row and you think it's due to fall into black next, or that the color red is somehow on a hot streak. Of course in reality, every time the ball is dropped into the wheel, your chances are exactly 50/50 of each color coming up. You're just looking at a display of total and utter randomness, and seeing a pattern that isn't there.
The gambler's fallacy is a permutation of the focusing effect, also known as anchoring. Your brain has a tendency to latch onto something and never let it go. It served you well back in the day when you were as likely to see the negative and positive consequences of people's decisions, helping you remember what happened to that farmer who tried to feed his family by burying a bunch of meat in his field.
But in modern times, we're far less likely to see the negative consequences. You hear about some hick winning $300 million and your brain latches onto that, conveniently forgetting that for the one guy who paid a buck and won $300 million, there are 299 million or so losers who might as well have paid a buck to get a swift kick to the shins.
Screw your rightness about the future, Orwell
There is one piece of good news to report: It turns out that one of the things that the focusing effect is most likely to make us over-value is how happy material wealth will make us (good health and being in love are much more likely to make you live a happy and fulfilled life - it's science).
In other words, maybe it's time we all bought a bottle of champagne, took a trip to the zoo, and told those Tigers who's number one.
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To see how else your brain is screwing with you, check out 5 Ways Your Brain Is Messing With Your Head. But don't worry, because you can turn the tables on it, in 5 Ways To Hack Your Brain Into Awesomeness.
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The argument against leaving Iraq was that a whole lot of innocent people would die and they'd go straight back to a bloody-handed dicatorship.
ReplyI thought they were out of the woods, but nope, it turns out that setting an unconditional date was the Muy Bad Idea people said it was after all. At least it's merely MEANDERING toward bloody-handed dictatorship.
Sounds like the Iraqis should probably do something about that. The flaw in that war was the fact that Iraq has no bearing upon the United States in any way shape or form.
Regardless of which direction that government goes, it'll have exactly zero impact in the United States.
They didn't pull out too soon. They pulled out because it wasn't going to work, it only wasted civilian and military lives, bankrupted the US, and shattered any sense of stability in Iraq (yes horrible dictator, but there were many dictators afoot, and many in even less stable countries. Freedom wasn't the goal, oil and money was). Not to mention makes foreign relations extremely difficult, was based on an untrue premise (they knew the weapons weren't there).
Not to mention the whole operation was an attack on the country itself instead, levelling buildings and gunning down their civilians. How in any universe the first step to helping someone form a better country? After you do that, who in their right mind would trust you?
Overall the operation was a clusterfuck of disaster that is near impossible to defend.
who else saw a picture of a gorilla in #1 paint splatter picture? Anyone? Anyone at all?
Replyi did. It has a weird puffy thing around its neck.
My mom is definitely a hoarder. "I paid $300 for when I bought it; it's not worthless". Cool story, mom, but you bought it 30 years ago and it's worth exactly zero today.
ReplyAnyone else feel they forgot what the title of the article was? Not in terms of content, but in the titling of the various sections "Sucks at figuring the oddds", who sucks at figuring the odds?
Reply Hide All See All 3 Repliesmy guess is that the original title had something about your brain in it and for some reason the editors changed it. Because all of the sections are referring to your brain.
No, I felt the same way to. The first two titles confused the crap out of me because they had nothing to do with what was written, and then I got to number 3, which was what I thought number 5 was about, and figured "Ok, this is ridiculous" and just stopped reading the titles altogether.
The introductory paragraph said, "For instance, your brain..." where the "..." leads to each section heading.
Mila Kunis is hot.
Replythe two biggest things i've learned from cracked are that my intelligence is an illusion and my stupidity is real.
Replyi'm beginning to believe that the zombie "i like turtles" kid is, in fact, a zen master. it all comes down to those three words for that kid...i should be so lucky.
I stopped at a local convenience store a few days back and had to wait behind a man cashing in $27 worth of winning scratch off tickets. It probably cost him about $60 to buy enough tickets to win that $27, but he was celebrating his "winnings" by using that money to get a pack of cigarettes and $24 in various scratchers. These, in turn will likely produce roughly $10-12 in "winnings" and those will be cashed in for more tickets until he has no winners. Either that or got paid and was able to supplement the winning tickets with a little more cash.
ReplyHe'd save time by just giving the money directly to the retailer and skipping the part that involves scratching off the tickets.
But hey, it supports the schools, so it's a good thing, right? All that lottery money that goes to the schools improves our kids educations, and it's earmarked, so it can't go into the general fund to be wasted. It's not like the legislators, can compensate for the earmarked lottery money by reducing the contribution from other sources by the same amount with the net effect being that lottery money ends up in the general fund anyway.
Oh, wait, they can? Well, I'm sure that, being ethical, honest citizens, they wouldn't resort to such a devious bait and switch on the poor, honest, working class folks who spend significant amounts of their income, often not even disposable income, on state-sponsored gambling with a less than 50% payout.
It really pisses me of when im at a gas station and the person in front of me- who looks like he can barely afford to put food in his stomach, will spend $100 on f*****g lotto tickets. Its really really sad.....
I never understood the point of gambling - as in Casino, "we're the only winners - the players don't stand a chance". Then one day I realized it's more of an entertainment expense for most people, not really a form of income. That entertainment merely comes in lots of forms. Not that it makes me any more interested (and holding up the line when I'm trying to buy a Slurpee kinda pisses me off), but at least I finally get why people will blow their grocery money for the momentary thrill of scratching off those lotto tickets that give back some of their money once in a while.
For an extra $50, I think horizoning comes into play.
Reply
Reply Hide All See All 3 RepliesI would agree that good health and love is all you need but... It's a lot easier to stay healthy when you can afford to eat fresh food, have a gym membership and SEE A FREAKING DOCTOR WHEN YOU GET SICK!
Or how about not having to struggle to pay bills while working 1 or more jobs? How lovey dovey do most of you feel after working 10 to 12 hours, 6 days a week to get by and still not either have enough free time or money to go out with your significant other?
MONEY WOULD MAKE ME VERY HAPPY!
Yes, but there's a difference between having A LOT of money and ENOUGH money.
Well there certainly are many variables, the two heavyweight ones can be directly influenced by you. It includes
1) Eating healthy (read nutrition labels people, some of the healthiest foods are the cheapest)
2) Exercising (jog for half a freaking hour a day, it will help you sleep better too)
It costs way less to make a homecooked meal than to buy a meal at McDonalds.
People's concept of probability in a roulette game used to amuse me so much when I worked as a croupier. Even some of my supervisors held to the idea of "4 blacks in a row... a red must come now." They also claimed that after getting a few large numbers a small number would be next. Bullshit! :D
Reply#6 is just an excuse to make dumbass Americans feel better -_- seriously how hard can it be to think ahead?
ReplyThe funniest part to me about 6 is that I think the government certainly helps out in the "I can't think about the future." dilemma. When you constantly change laws, make bad decisions, and go back on your word, how can a person actually expect anything from you?
If not believing that social security will be there when I'm old enough to collect makes me foolish, then I guess I'm foolish.
I don't think we take the $50 now because we can't differ gratitude, I take the $50 now because $100 may be $0 in a year. If there's some real credible assurance I can wait forever.
Remember that part about being bad at probability? It would take about 650,000,000 million losers in a typical state lottery to produce that on $300 million dollar winner, based on approx 45% payout to the top prize. It's much worse than stated.
ReplyThe probability one is flawed about the example of the roulette ball. If it lands on red 3x in a row, it actually is more likely that black will appear next. The first time, the odds are 1/2. The odds of it happening 2x is 1/4. And it decreases every sequential time. It is much more likely that the 4th one will be black than another red
Reply Hide All See All 7 RepliesThanks for proving the point of the article
You're still measuring from the before the wheel has spun. In roulette, Past results have no influence on future results. So while the odds of spinning 10 reds in a row are fairly unlikely, once the first 9 reds have come up, the odds of the next one coming up red is exactly the same as the first spin.
The roulette one actually *is* flawed - but not for the reason you claim. In fact, the odds aren't 50/50 because there's the 0 & 00 slots, so there is a small possibility that result won't be black *or* red. And yeah, nice job of demonstrating the point of the article. Roulette wheels don't have a memory, dumbass.
Look, I'll be the polite one here and explain why you're wrong. Statistics as applied to gambling are basically a method of mathematically guessing better. It's still *just* guessing, though. In order for statistics to work the way you're suggesting, you have to decide how you feel about fate.
If you don't believe in fate, all statistics are bullshit. You would have to know all of the factors in existence relating to each event -- in advance -- to calculate the chain reaction that would produce the result correctly. You can't do that, in part, because you aren't in physically control of the gambling device and, in part, because calculating the chain reaction would also have to take your reaction to the calculation into account.
Alternately, if you believe fate does exist, all statistics are bullshit. One thing has a 100% chance of happening and everything else has a 0% chance of happening. Whether or not your statistics show red coming up next, you were already going to decide whether or not to bet, and the win/lose result was already going to happen. Whether or not statistics claimed it was likely is irrelevant because it was always going to happen. The fraction you were looking at was just there to make you feel good about the illusion of free will you entertain when you were already supposed to.
Blandy that's a lot of talking to explain a simple concept. Let's take it down to a coinflip and eliminate the 0 and 00. (I'm also assuming it will never land on its side.) No matter what the previous results are the probability that it will come up heads is 1 out of 2. There are 2 choices, and it will be 1 of them. Expressed in a percentage 50% or 50/100 or 1/2.
It's that simple. No matter what came before.
Thanks for explaining the 7th logical fallacy the author failed to mention.
Alternatly if it hits red ten times in a row, maybe it's not actually perfectly random. They're rigging the game!! *Gasp*
I get the disposition thing all the time, especially in online games with rudimentary markets (I don't like saying "world of warcraft" out loud, it embarrasses me). I buy into stuff that is no longer useful and refuse to sell it for less than I paid for, thinking (against logic and evidence) that it's going to become more valuable eventually.
ReplyTechnically, in the Mac/PC scenario, it's also about the OS, and what you're looking for in a computer, not just the price.
ReplyYou must have skipped the part that said that the pc has everything you want, yadda yadda yadda....
And that had any relevance to the argument he was making how...?
#5 applies to completists who have to have all of something like video game DLC and all the issues of a comic book story even though they might have liked it that much. Just yesterday I bought DLC for a video game I've never even played!
ReplyNumber one thanks to Science (also mathematics, philosophy and maybe some other disciplines)
Reply"...when we've got a gangster [role] of Washington's in our fist a..."
ReplyI think the writer means "roll". Caveman Ack just say.
so many of these are me...i kept a twenty dollar bill in my wallet because it made me feel rich, where i know i swiped my debit card for stupid things three dollars at a time...
ReplyThat's why I like large bills. I don't want to use them
I have done pretty well for myself then as I don't have credit cards, don't gamble and avoid hoarding useless shit.
ReplyI tend to hoard crap then one day, I get bored then decide to start stuffing clothes, toys and books into bags and writing "GIVE TO CHARITY" on them. I got about 10 bags full of stuff last time. I don't have credit cards either but that's because I don't like them. Too young to gamble and I don't really see how fun it is to sit at a pokie machine all day
Only problem about not having a single line of credit, life becomes more difficult today. Can't order from many places online (paypal not offered) without one, can't get a house, can't use certain services, etc. It's a sad truth, because I don't actually want one.