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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.

Do you have something funny to say about a random topic? You could be on the front page of Cracked.com tomorrow. Go here and find out how to create a Topic Page.

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.

And check out The Top 99 Most Desirable Women of 2010 over at Ask Men or head to our Top Picks (Updated 1.19.2010) to see other stuff we're looking at around the web.

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