In their 2023 book The Missing Billionaires: A Guide to Better Financial Decisions, Victor Haghani and James White present a thought-provoking essay titled “Extrapolators Beware the Money Pump.” It is a cautionary tale about how investors who base decisions solely on past returns can be systematically exploited — even when investing in assets with positive expected returns.
The essay introduces Mr. X, a fictional investor who allocates capital based on historical performance. Two savvy traders, Ping and Pong, manipulate prices just enough to trigger Mr. X’s extrapolative instincts. Each time he rebalances his portfolio in response to a price change, they extract a small amount of his wealth. Throughout thousands of trades, Mr. X is effectively drained — not because he’s irrational, but because his decision-making model is internally inconsistent. This concept — the “money pump” — is especially relevant in infrastructure investing, where assets are
