Here are the top 5 reasons why people do some crazy things with their money
Why people will keep invest in those crazy luxury cars?
“People do some crazy things with money, but people are not crazy.”
This is a quote from the book “The Psychology of Money” by Morgan Housel. He begins by arguing that while people may appear to do irrational things with money — like investing in cars — there is a rationality beneath that apparent madness.
The brain is incredibly complex, and our understanding of it is still limited. Steven Pinker suggests that our current knowledge of the brain is comparable to what we knew about the human body centuries ago.
While there are still mysteries in human behavior, such as driving while drinking, many behaviors can be explained.
Last weekend, I visited the Yorkville Exotic Car Show. It’s an annual event where car owners showcase their vehicles.
The show featured a range of cars, from classics from the ’50s and ’60s to modern Porsches, and even a dancing and singing Tesla — a clever marketing tactic.
As I wandered the streets, I chatted with several car owners about their vehicles. I began to wonder why people invest so much time, money, and effort into their cars.
Some of the cars were stunningly beautiful, like an old-school Aston Martin and an Alfa Romeo. I approached the owner of a blue Alfa, which I believe was from the ’70s or ‘80s.
I asked, “How do you keep the color so pristine on the car?” He laughed and replied, “I don’t drive it much.” Clearly, these owners aren’t using their James Bond cars for grocery runs.
On my way home, I stopped by my favorite spot, the Indigo store. I love this place for countless reasons, but that Sunday, I just wanted a few minutes of rest.
While sitting, I took out my phone and made some notes about why people do seemingly irrational things with money. I applied the mental biases I’ve recently learned to explain this behavior.
Here are five mental biases that explain collectors’ behavior:
But first…Mental biases: what are they?
Those are shortcuts our brains take, usually based on our experiences or emotions, which usually lead to bad judgments or decisions.
Endowment Effect
The Endowment Effect is a psychological bias where people place a higher value on things simply because they own them.
This concept was formally identified by economist Richard Thaler in 1980. As a pioneer in behavioral economics, Thaler introduced this term to explain why people tend to overvalue their possessions once they take ownership.
Because of the Endowment Effect, folks often set higher prices for their belongings or resist trading them, regardless of their actual market value.
This bias shows how ownership can distort our sense of value, making us overestimate the worth of what we own.
Collectors value their cars more highly simply because they own them. You know what I’m talking about if you’ve ever sold your car.
Imagine owning one of those iconic James Bond cars. How would you feel?You feel special and unique just by owning it. After all, how many people have such a piece of art in their garage? Very few.
The Sunk Cost Fallacy
This idea ties directly to our earlier talk.
The Sunk Cost Fallacy is a reasoning error where people continue investing in something that’s not producing good results simply because they’ve already invested a lot of resources, like money, time, or effort, into it.
During the show, I asked one of the owners how much he’d spent on his car. He couldn’t give me an exact number but admitted it was more than he expected.
Collectors often fall into the sunk cost fallacy trap by continuing to invest in restoring or maintaining cars that have already consumed significant resources.
They may spend thousands of dollars on these cars even when the value no longer justifies it. They feel compelled to keep investing because they’ve already sunk so much money into it and can’t bear to give up.
This leads them to make decisions based on their past losses. While these cars may hold significant emotional value for them, to many others — myself included — it seems like a questionable choice.
Confirmation bias
This is my favorite mental shortcut. It’s called confirmation because we conform to our existing beliefs.
Confirmation bias is a way of thinking that leads us to favor information that confirms our pre-existing beliefs , while undervaluing evidence that contradicts them.
In case you were to ask a collector who among all the guys in the show has the best car, you would probably know the answer by now. It’s when we don’t look at facts that might contradict our beliefs.
This mental shortcut is probably one of the most dangerous in our lives because it affects how we gather and interpret information.
If you’re a vegan like me, you’ll likely only see the benefits of a vegan diet (of course, there are no downsides to it). I will probably never read an article that argues otherwise.
Bandwagon Effect
This is just a fancy term for “social proof.”
It’s a psychological phenomenon where people do something mainly because others are doing it. We often see this in consumer behavior, voting, and social media trends, where folks feel more comfortable following the crowd.
For example, if many people start buying a particular brand or product, others might follow suit, believing that its popularity validates the choice (iPhone).
The bandwagon effect also impacts car collectors who notice their friends investing more money in cars. Most of these collectors are friends and have known each other for years.
The bandwagon effect impacts car collectors who notice their friends investing more money in cars. Most of these enthusiasts are friends and have known each other for years.
When they see others making similar investments, it can trigger a social proof mechanism.
Lastly, there’s the fear of losing out, also known as FOMO.
FOMO (Fear of Missing Out)
FOMO, or Fear of Missing Out, is a psychological phenomenon that makes people anxious or worried about missing rewarding experiences others might be having.
This is why some people never sell their cars; they’re afraid of the feeling of not having them and missing out.
Essentially, FOMO drives many of our actions. Many people don’t give up foods that are bad for them because they’re afraid of missing out on something by not eating them. It might sound crazy, but this is how people often operate.
Conclusions
The tricky part about these mental shortcuts is that simply knowing about them doesn’t change anything. Why should you care?
Take, for instance, the last time I went to a theater. After half an hour, I realized I didn’t like the show. But I didn’t leave. I told myself, “You paid for the ticket,” “You’ve already invested time to get here,” and “You can’t just leave in the middle; people will look at you strangely.”
If I had recognized this as a mental trick my mind was playing, I could have ignored those thoughts and done something more productive with my time.
By understanding these mental shortcuts, you can start regaining a bit of control over your mind.
