Sep 25, 2015

Avoid Falling Victim to the ‘Sunk Cost Fallacy’

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In the following scenario, what would you do if you were the dealer involved? At an estate auction you find a lovely Nickelodeon (coin-operated player piano with drums, etc.) that seems to be in working order. The auctioneer claims that it “has been partially restored and plays well. Just needs tuning.” You check and find that a similar item recently sold for $9,850. When you’re the winning bidder at $750 you think you’ve struck gold.

You hire piano movers to take it to your shop, and that sets you back another $175. You call to get the piano tuned, and the tuner tells you that it can’t be tuned; it needs new tuning pins. And, by the way, as long as you’re getting new pins, new strings would be beneficial. Of course, the piano must be moved to the tuner’s shop and back at a cost of $175 each way. New strings and pins cost $1,200. You have $925 invested so far; do you spend another $1,550 on top of that to realize a potential profit of $7,375? Your total investment will be $2,475; you’ll almost triple your money when it sells so you decide that it’s worth the risk. And besides, you already have about $1,000 invested and you don’t want to throw that money away.

Once the work is done the piano sits in your shop for five years. Along the way, you pay to have it tuned regularly and an occasional note repaired. Your customers enjoy hearing it play, but priced at $10,900 none offer to buy it. One Saturday a customer offers you $1,500 for the instrument; it’s the only offer you’ve ever had. Do you take it? Or do you hold on to the piano in the hope that you will at least recoup your costs? >>>Read More

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