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When in doubt, sell
It seems that Bildungsroman has sold her books in Costa Rica, after an agonizing Auseinandersetzung over the matter.
I know not the details of this case, but empirical economics suggests a lesson. Endowment effects are significant, especially for people who are not professional traders of the item in question. That means we tend to value things more, simply because those things are ours.
With some probability, that tendency is just plain irrational. It might make sense to treat our friends or our babies this way, or to act this way in a subsistence economy, but endowment effects should not rule the behavior of not-so-risk-averse well-off, Americans. So if you are even considering selling something, you probably should do so.
Bye, bye books. And don't buy another commodity, invest in memorable experiences.
I might add that when it concerns equities, buy and hold is better than portfolio turnover. For second best reasons, people would be better served by a stronger endowment effect; greater possessiveness would cancel out their mistaken belief that they can beat the market.
Addendum: I believe that endowment effects are stronger for items we have paid for or won through competitive effort. This means that your kid should pay for some of his or her college education, read more here.
Posted by Tyler Cowen on December 12, 2006 at 01:36 PM in Economics | Permalink
Comments
I told Jacqueline to distribute all her books to the passengers of the plane before check-in and get them after landing.
Posted by: Antoninov at Dec 12, 2006 1:57:31 PM
Since the marginal cost was going to be $3/pound to bring them on as excess/overweight luggage, I added a column to my spreadsheet for the weight of each book and another to calculate how much they would cost to bring. I'd previously looked up the best used price on Amazon Marketplace for replacing them in the US. So I made another column to calculate (best used price) + ($3.49 for Amazon Marketplace shipping) - (the weight in pounds * $3/pound) for what I should sell them for in Costa Rica. For all the books for which that number was negative or close to zero I sold them cheaply or gave them away, for books for which that number was more than $1 I made that a "firm" price on the book to see if anyone wanted to save me the hassle of schlepping it back. It turned out that even though my firm prices were far above the usual garage sale price level for books that people were still interested in buying most of them because English language books are expensive and not common in Costa Rica. My favorite customer was the one who bought my box of econ textbooks and related reference materials to donate to a school for smart kids from poor countries. :)
I do like to keep a large library of non-fiction books around for reference because I have a poor memory, and for many topics the internet just doesn't have good substitutes available yet. I'm really looking forward to the eventual development of an ebook reader and format that is as comfortable as a paper book, and the availability of far more books in that format....
Posted by: Jacqueline at Dec 12, 2006 2:09:11 PM
"My favorite customer was the one who bought my box of econ textbooks and related reference materials to donate to a school for smart kids from poor countries. :)"
That's nice indeed!
Posted by: Antoninov at Dec 12, 2006 2:25:11 PM
Can you please fix your feed? Thirty-odd posts continue to be flagged as new.
Posted by: vlad at Dec 12, 2006 4:37:03 PM
Endowment effects in financial markets are as often good as bad.
Rebalancing is a very important and completely counterintuitive
part of optimal portfolio management. People are very reluctant to
sell their winners--endowment effects would just make this effect worse.
Posted by: Peter at Dec 12, 2006 5:08:41 PM
I thought people tend to hang onto their losers and cash out their winners?
Posted by: gundryggia at Dec 12, 2006 9:54:23 PM
I didn't know Paul Heyne became an author.
What a great teacher he was...
Sad to see he's passed on.
Posted by: alphie at Dec 13, 2006 12:49:11 AM
Finally a robust economic explanation for why I get rid of almost everything. And why my wife does the opposite.
Posted by: Martin at Dec 13, 2006 12:42:39 PM
This is why it's so difficult to get anyone to trade with me in my fantasy football league.
I'm certain the situation were reversed they'd also refuse exactly the opposite player trade. (If they have player A and I have player B, they refuse to trade A for B. If they have player B and I have player A, they refuse that trade also.)
With regards to equities at least there's the option to sell half or buy half when I'm conflicted. I've regularly taken up that approach of increasing or decreasing positions rather than outright buying all/selling all. In my experience a bias towards letting winners run is a good approach.
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