At a lively party in Los Angeles, Harry Lockhart (Robert Downey Jr.) begins to narrate a series of bizarre events leading up to this moment. After a botched burglary leaves his friend shot, Harry narrowly escapes the police by stumbling into an audition. Surprisingly, his frantic display of guilt is misinterpreted as a showcase of method acting, impressing the producers.
At a subsequent Hollywood gathering, Harry meets the suave private investigator Perry van Shrike (Val Kilmer), who has been brought in to give Harry real-life detective experience for his role. Among the characters at the party is Harlan Dexter, a seasoned actor who recently resolved a decade-long feud regarding his wife's inheritance with their daughter, Veronica. The night takes a turn when Harry encounters Harmony Lane (Michelle Monaghan), his childhood crush, only to wake up next to her unwelcoming friend the following morning. Filled with regret, Harry rushes to Harmony’s home at dawn to express his apologies.
As fate would have it, Harry and Perry witness a sinister act where a vehicle is cast into a nearby lake, and they catch the attention of the potential murderers involved. In a desperate attempt to save a potential victim, Perry unwittingly shoots the trunk lock of the car, only to discover a female corpse inside. The situation worsens when they realize they cannot report this incident without implicating themselves.
Harmony reaches out to Harry, revealing a troubling family matter: her sister Jenna arrived in L.A., misappropriated Harmony's credit cards, and subsequently committed suicide. Misled into thinking Harry possesses detective skills, Harmony pleads with him to investigate Jenna’s death, suggesting it may have been a murder. Shortly after their conversation, Harry finds the corpse from the lake in his bathroom alongside a hidden gun. In a panic, Harry and Perry dispose of the body, later identified by police as Veronica Dexter. This leads Harry to uncover that Harmony's credit card was used to enlist Perry's help at the lake, linking Jenna’s death to their investigation.
In an unfortunate turn, while visiting Harmony, Harry suffers a horrific injury—his finger gets severed when she accidentally slams the door. Despite his injury, Harry joins Harmony at a party, but is abruptly kidnapped by the lake's killers, who threaten him into abandoning the inquiry. Instead of succumbing to fear, Harmony overhears these criminals heading toward Perry’s surveillance site. She bravely rushes away from Harry to warn Perry, resulting in a dramatic confrontation where one of the criminals meets their end at the hands of a food-cart operator.
Unexpectedly, a pink-haired accomplice of the killers steals Harmony’s car, inadvertently transporting an unconscious Harry to a safe house, but the killers soon locate her, leading to further violence. With his courage reignited, Harry manages to recover a firearm and eliminate the remaining threat, although he loses his severed finger yet again in the chaos when a dog devours it. Later, Harmony confronts Harry at his hotel, revealing she had confided to Jenna about Harlan Dexter being her biological father. A heated argument ensues, leading to Harmony leaving, yet Harry is cautious not to injure her again.
In the aftermath, with Harmony temporarily out of reach, Harry and Perry redirect their investigation to Harlan Dexter’s private health clinic. It becomes clear that Veronica Dexter had been confined there to cover up her case. The duo captures a guard for questioning but in their clumsy haste, mistakenly kills him, which results in their capture by Dexter himself. He unveils his sinister plan to cremate his daughter’s remains, intending to obliterate any trace of wrongdoing.
Desperate for answers, Harry calls Harmony, who is revealed not to be missing but rather busy at work. In a daring move, she seizes the van holding Jenna's coffin. Despite escaping, her van crashes during the pursuit. When the gunfire erupts, Perry sustains injuries while Harry bravely confronts Dexter and his henchmen, ultimately bringing them down but not without sustaining a gunshot wound himself.
Upon waking up in the hospital, Harry finds both Perry and Harmony safe. Perry then reveals the truth behind Jenna’s demise: it was not a murder, but a suicide stemming from trauma, as Jenna escaped a life of incest back in Indiana only to be tragically misled about her heritage.
In a poignant scene, Perry faces Jenna’s ailing father, furiously confronting him over his past misdeeds. Convinced of his moral victory, Perry issues parting words, leaving the old man to grapple with his guilt.
Meanwhile, left reeling from his missed opportunity of a movie role, Harry emerges with a new path, now beginning his career under the guidance of Perry, signaling a bittersweet conclusion to an absurdly tangled tale of love, deception, and redemption.
