Monday, July 4, 2011

Stop being such a good loser

It's been a decade since I stopped playing Magic: The Gathering, and about five years since since I painted my last Warhammer 40K figure. I don't watch anime, Dr. Who or Firefly and I put more effort into my appearance than on my forum tag lines.

But I still get nerd cred because of one integral personality quirk, one little reflex that sticks out like a pocket protector and redeems my mainstream camouflage: I get unreasonably annoyed when someone makes an intuitive conclusion that violates some esoteric concept that average people have no reason to understand.

In this case, it's the idea of easy come, easy go. Say a friend at a thrift store looking through a $5 item bin finds the Cosmos DVD set staring Carl Sagan, which they would be willing to buy for its retail price of $130. They buy it, but somehow lose it before they go home.

Most people I know in that situation will be disappointed, but say something cheery like "Oh well, I'm only out $5."

And that's when my teeth gnash.

That person is not out a mere $5, they are out $130 dollars. Let me explain.

Prices and values are not the same thing. The price is what you give up to have something. The value is what something is actually worth to you. If the price is lower than what you value something, then the difference is called your consumer surplus. In the example, the friend just left that thrift store with a DVD set and a $125 consumer surplus, and should be very glad to have both.

After you've paid something and you can't do anything to reverse the purchase, what you paid is called a sunk cost. You don't need to factor sunk costs into future actions - doing so is a common fallacy - so just remove them from consideration. Once a cost is sunk, it's irrelevant. Your friend paid $5, and left with $130 in value. It doesn't matter if the store took $5, $10 or $50 for those DVD - that cost is now sunk. The DVD set is still worth $130 to your friend.

So when your friend says "easy come, easy go. I'm only out $5," they are looking at a sunk cost, and forgetting about that amazing consumer surplus they were so happy to have earlier.

Remember those consumer surpluses - they're yours, and if something takes them from you, get very upset.

1 comment:

  1. This might be easier for a reader to understand if you used something else as your example. It's hard to quanify the enjoyment from owning a DVD set. Perhaps you could have said that this person knew they could sell the set for $130 on ebay. Losing it would perhaps more obviously show the full lost value.

    Or if the item was something we knew he was going to have to buy later. Like if he specifically was looking for a bike. If after losing it he still needs to spend $130 on another it will be more obvious that he lost something worth $130.

    Perhaps I'm wrong though. But I agree, that Sagan DVD set is totally worth $130!