Victor Haghani and James White’s essay “Extrapolators Beware the Money Pump,” published in their 2023 book The Missing Billionaires: A Guide to Better Financial Decisions, offers a compelling thought experiment that should give institutional investors pause. In it, the authors describe a fictional investor, Mr. X, who allocates capital based solely on past returns. Two savvy traders exploit his behavior through subtle price movements. Over time, Mr. X loses nearly all his wealth — not through recklessness but by consistently following his own flawed logic.
The concept of the “money pump” is that if an investor’s preferences are inconsistent or extrapolative, they can be systematically exploited by more sophisticated market participants. Mr. X is not irrational in the conventional sense. But his preferences, when aggregated over time, allow for exploitation.
While the example is stylized, the implications for institutional real estate investors ar
