Behavioral Economics: Dumb Stuff People Do

3 Ways People Are Dumb With Money

Author

Ajay Malhotra
February 17, 2025 • Estimated Reading Time: 5 minutes

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You won't believe what happened to me last weekend... I was helping my mom clean out our old garage when I stumbled upon my childhood Pokemon card collection. Among them?

A mint condition first edition Charizard (I know, wild!). After checking online, I realized it was worth about $3,000. 

But here's the thing - instead of selling it, my first instinct was to frame it!

This got me thinking about how irrational we can be with money.

And it turns out, there's fascinating research behind why we make these seemingly illogical financial decisions.

Today, I want to share three surprising ways our brains trick us into making poor money choices (and how to outsmart them):

1. The "I Already Own It" Trap Problem

Remember that Charizard card?

Here's what's bizarre - if I saw that same card in a store for $3,000, I wouldn't dream of buying it.

Yet when I found it in my garage, I was reluctant to sell!

Economists call this the "endowment effect" - we value things we own much more than identical things we don't own. 

I see this all the time with founders holding onto underperforming investments just because they already own them.

Solution: When making decisions about assets you own, ask yourself: "If I didn't own this right now, would I spend the market price to acquire it?"

This simple mental flip has helped me make better decisions about everything from stock holdings to office equipment.

Just last month, I sold some company software licenses we weren't fully utilizing after asking this question.

2. The "Get My Money's Worth" Mindset Problem

Ever sat through a terrible movie just because you paid for it?

Or finished a meal you weren't enjoying?

This is the "sunk cost fallacy" at work.

I recently caught myself doing this with an annual subscription service I barely used - but kept telling myself "I need to make the most of it!"

Solution: Create a simple decision rule: Evaluate future choices based only on future costs and benefits.

The money you've already spent is gone - it should have zero influence on your next move.

Now, whenever I'm torn about abandoning a project or investment, I write down only the future costs and benefits, completely ignoring what I've already invested.

This approach has saved my company countless hours and dollars that would have been wasted chasing sunk costs.

3. The "Mental Money Buckets" Problem

Here's a quick question: Would you walk 10 minutes to save $5 on a $15 pair of headphones?

Most people say yes.

Now, would you walk 10 minutes to save $5 on a $675 laptop?

Most say no - even though it's exactly the same $5!

This is what Nobel Prize winner Richard Thaler calls "mental accounting" - we treat money differently depending on its context.

Solution: Create a unified value framework.

Instead of thinking in terms of percentages or contexts, convert everything to absolute values and time.

For example, I now ask: "Is this worth X hours of my time/company's revenue?" 

This helps standardize decisions across different "buckets."

For business expenses, we've implemented a simple ROI calculator that treats every dollar the same, whether it's coming from "unexpected income" or "core budget."

Final Thought: The Power of Rational Decision-Making

The key to building wealth isn't just about making more money - it's about understanding how your brain works with money.

Next time you're making a financial decision, ask yourself: "What would a completely rational person do here?"

(I like to call this the "Penny Test" - imagine a person who approaches every money decision with perfect logic).

Hit reply and share your biggest money bias—I'll personally respond to 5 readers!

To your wealth,

Be Wealth Operators

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