Entries Tagged 'Economics' ↓

The price you paid for an item, be it a house or a compact disc, has nothing to do with its worth to someone else. Many garage sale proprietors, people trying to sell their decade-old “collectables,” and some people trying to sell a house in a buyer’s market frequently make this mistake. These people haven’t learned about sunk cost. They bought an item in demand and now they are in denial about its worth. Their asking price is too high so they can’t sell. They cling desperately to the idea that everyone else is crazy or stupid for passing up a great opportunity, never questioning their own rationality.When you’re selling something forget what you paid for it. It doesn’t matter to anyone, but you! What matters is the price the market will bear and what the item is worth to you. Be glad if the warm fuzzies you feel possessing a pristinely preserved Pokemon® card is worth more to you than the penny my son would give you for it; The market works.

Toddlers seem to intuit opportunity cost. My son Logan and I were playing with his new GeoTrax last night when I told him it was time to take a bath. Do you think he liked the idea? Heck no! He seemed to understand that the best use of his time was playing with his train. Since opportunity cost is the cost of something in terms of an opportunity foregone, for my son the opportunity cost of the bath was the playtime he wouldn’t enjoy. The opportunity cost of playing with his GeoTrax was one missed bath. His choice suggests he was selecting the most rational option, but perhaps we’re missing something. Continue reading →