Question: A friend of mine recently purchased a second-hand automobile and is anxious to show me the acquisition he is so proud of. I happen to know that this car is not what he thinks it is. Should I tell him what I really think or should I let him be happy in his ignorance?
Answer: The right thing for you to do depends on the seriousness of the problem with the car. If it is of so substantial a nature that your friend will have real trouble in driving and maintaining such a vehicle, there is a likelihood that he would, upon hearing this from you, be able to cancel the bad deal he made and get his money back. If this is indeed the case you have a responsibility to help him retrieve his investment just as you would have to return a lost item which you found.
If, however, it is simply a matter that you don’t like the car he bought and believe he could have done a better deal your obligation is to make him feel good about his purchase. The source for this is a debate in the Talmud (Mesechet Ketubot 17a) between the Academies of Hillel and Shammai about how one should sing the praises of a bride. In contrast to the Shammai approach that one must refrain from praising her charms when there is something obviously wrong with her because this would be considered a falsehood, the Hillel approach is to offer comprehensive praise. To support this position these Sages rhetorically ask: "When one has made a purchase do you praise it or put it down?" The obvious answer is that you praise it in line with the caution of our Sages that one should always strive to get along with people.
Why this is not considered a falsehood, explains Maharsha, is that we must assume that the purchaser was attracted to the item he bought, and you are merely praising the "beauty in the eye of the beholder".