Where should I send the Downloads?
I Will Teach You To Be Rich
May 16, 2006 · 7 comments
A nice post from the Kiplinger blog about boiled shrimp and investing (huh?):
Boiled Shrimp and the Sunk-Cost Fallacy
Is this a test to see if we’re paying attention? (See May 1st)
I actually had a macro economics professor in college that taught us about this. He used the analogy of holding Tony Orlando tickets (a performer in Branson), and how even though you spent money on those tickets, if you didn’t actually feel like going to see Tony Orlando that day, but you went anyway, you were stupid. Actually, he said that we weren’t “maximizing our economic utility,” but we knew what he meant. And that he didn’t like Tony Orlando.
Interesting article. I guess it’s true, if you waste money on something you don’t want to do, then why waste your time actually doing it?
However, what if you don’t want to do something but your significant other does? If it keeps them happy, that problably means you will stay happy. What if your wife likes shrimp but you hate it, maybe you will get a much better return after wasting 8 dollars and an hour of time to make it!
Freelove: Oops. Man, you guys are sharp.
QUOTE:”Freelove: Oops. Man, you guys are sharp ”
LOL, Oh I get it! Ramit, Yes – now I’m paying attention
Wouldn’t the best thing to do be to either freeze them for some other time when you aren’t so pressed for time OR, even better, return them to the grocery store for a refund. OR OR OR check your receipt before you leave the store because crap like this happens all the time (double charges, you don’t get the sale price, you accidentally pay for something that you didn’t buy, whatever) and be done with the whole damn thing. A small leak (or, more typically, many small leaks) will sink a great ship.
While sunk costs are an important concept for investors to understand, Mr. Feinberg made another “rookie mistake” in his analysis; he ignored transaction costs.
When the hypothetical $50 stock reaches $5, it may not make any sense to sell. A commission that represented a very small percentage of the transaction at $50 could represent an enourmous percentage at $5.
Example: You buy 20 shares at $50, paying $10 commission. Your total cost is $1,010, or $50.50 per share. The stock falls to $5 per share. On paper your position is worth $100, but if you sell, you will pay another $10 commission and will only come away with $90. So the question is not whether the stock is worth $5 per share, but whether it is worth $4.50 per share.
The difference between $50 and $50.50 per share is a lot smaller than the difference between $5 and $4.50 per share!
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