Mental Accounting of Entrepreneurs

I believe it takes a different mindset to be an entrepreneur. With it goes a different mental accounting. I am almost convinced that all those with a complete rational take on things, estimate likelihood of alternative scenarios and evaluate Net Present Value of all available options to choose the best possible course do not get into entrepreneurship. Here is one cost that will be immaterial in a rational decision making process but to an entrepreneur who is, “fired up and ready to go”, it is extremely relevant.

Sunk Costs: We have already come so far, we cannot give up now!

“I had invested my life savings and I knew there was no turning back,” says Mr. Conway in an interview with The Journal. To the rational decision maker it is clear that costs in the past are immaterial to decisions at hand. But it is exactly those past investments that keep entrepreneurs moving forward. In fact some take steps to sink enough costs to given them the justification to stay the course.

We need those brave souls who are unfazed by numerous failures and have the mental strength to “not let the past investments go to waste”.

Pricing Your Garage Sale – 4 Things to consider

I received somewhat surprisingly high number of views on  How to price your garage sale article I wrote. I think people are searching online because of the time of the year for tips on pricing their garage sale. The article I wrote was probably not suited for the most common garage sales that sells many items for less than $5.   Here is a set of 4 things to consider before your sale:

  1. Is it worth it?: Think of the opportunity cost of time spent categorizing, labeling, advertising and finally spending 3-4 hours manning the shop. Suppose your time is worth $50/hour, would you make more than $250 from your garage sale? If not, is it worth doing? Frugal families blog says, “anything under $2 sells fast”. That means you need 125 such items just to break even (after the opportunity cost). Note that you value your junk, err treasures, more than your potential buyers would due to endowment effect.  Don’t overestimate the total sales to justify the effort.
  2. Alternatives?: Are there alternatives to garage sale like giving the items away to local charity and claiming tax deduction? If you do not itemize your taxes this does not help you. But think of the time saved and the general euphoria, however fleeting, from donating things?
  3. It is sunk, now keep moving: You might have bought your item at a higher price or you might have spent considerable effort building or improving it. Do the money and time spent in the past justify additional time and money for holding a garage sale? No, what you spent in the past is sunk. You should only consider the effort not spent and pick the best among the alternatives.
  4. Doing it for the experience: May be you do value the experience more: If you really think that the experience of holding a garage sale means something to you, be it a lesson in negotiation or just a way to meet the neighbors then by all means do it. However see (2) again.