Sunk costs and moderating emotional upsets

One of the best things about being an economist is understanding sunk costs.

Sunk cost is the idea that you can’t change the past.  What’s done is done.  How much effort you put in or what you spent in the past shouldn’t matter in your decision making.  All that matters is where you are now at this point in time and what the costs and benefits are in the future.  Compare the future costs and benefits, not the future plus the past.

The canonical example given: It is raining and you had a hard day at work.  You have tickets for a basketball game that you were looking forward to, but now you’re not so sure.  Should your answer about whether to go or not depend on how much you paid for the tickets?

If you understand sunk costs, then the answer should be no.  The costs of driving in the rain and not going to bed early should be weighed only against the pleasure you get from going to the event.  Your answer should be no different if you paid $60 for the tickets or if your sister got them for you from her fancy corporate job (right before you were about to purchase them yourself).  Most people don’t understand sunk costs, not even rationally.  (In fact, some folks may want to argue with me in the comments– knock yourselves out!)

Even though I rationally understand sunk costs, sometimes I have to be reminded.  It’s like when I went into labor with DC1 and my mom said, “Shouldn’t you be breathing or something?”  Oh yeah, breathing.  That made things a lot less painful.

Most recently… I’ve been working on a paper off and on for an embarrassingly long time.  Finally someone else decided to scoop me on it.  I need to get the damn thing out before they get published.  Soon.  When I found out I was a mess… I have spent WAY too much time on the paper, much of it going down blocked alleyways.  And it was almost done two years ago and I put it down again.  It could have been out two years ago and then I wouldn’t be being scooped.

DH says magic phrase, “sunk costs.”

Oh yeah.  Sunk costs.  All that matters is what I do now, which is less work because I just need to incorporate the things from my (cough 2009 cough) power point into the paper, smooth it up, and send it out.  And hey, that’s less work on a paper that I’m frankly quite sick of than I would have to do if I wanted to get it into a better journal.

Truly understanding sunk costs can help a person stop being emotionally blocked, and enable a person to move forward.  Have no regrets, take what you can learn, and move on.

Not that I’m not kicking myself in t-1 (also t-3, and t-7), but what can you do?  Nothing.  Just move forward.

Advertisements

link love

It’s a good thing the fiscal year doesn’t match up with the academic year and IRAs were only 3K when we were first putting money away in them, because there were some academic years when all our income was stipend.  Though I think DH was paid the right way so maybe it would have been ok anyway given we were married.  Evolving PF explains what earned income is and how stipends are counted.

Finally, an article on what the political BOYS are wearing for a change.

Recently I’ve given up a few hundred dollars from textbook companies because they were ethically dubious transactions (one of them I even asked the University ethics office about, but alas, they said no go), but good financial cents gave up $198000 in exchange for freedom.

Lotta great discussion on why the Romney binder comment (and the rest of his comments on women) were harmful.  Here’s isis, hush, and historiann.  They all make great and different points, so read them all!

Miser-mom says she’s got 30 posts left.  Convince her she’s an academic blogger and thus should update sporadically but longer-term.  Also her post today on the freeing aspects of frugality is excellent.  (She takes on the “live today for you may die tomorrow” meme.)

Not a link, but an update:  I got another grant so now I have (3 grants and) 3 months summer salary.  Looks like we’ll be funding those Roths next year!  Or visiting my sister at her (not yet set in stone) overseas job…

We were in this week’s carnival of personal finance.

Ask the grumpies: When to buy vs. rent

rented life:

When do you know it’s the right time to buy a house instead of renting? Is it better to rent until you have a sizable downpayment? (Let’s assume the plan is to stay in area so buying to have to sell right away isn’t likely.)

There are some good generally agreed upon heuristics for when not to buy.

#1.  (As you point out in your question…) Don’t buy unless you’re planning on sticking in the same place for at least 5 years.  Housing markets bounce up and down, with a general upward slope overall, and you’re less likely to be underwater if you hold onto the house for a while (note:  this is the same heuristic as the one for investing in the stock market!).  Being underwater when you’re living in a house isn’t a big deal (and may mean your property tax drops), but it’s a huge hassle and can be very expensive when you’re trying to sell.  (If you’re willing and able to take the loss of the price of the house, this rule can be relaxed– if houses are under 100K and you have much more than that in savings and a large income, you’ll probably be ok even if you only stick around a couple years and take a loss.)

#2.  Don’t buy unless you have at least 20% down (and no other major consumer debt).  Being able to save that 20% means you have discipline, that you are used to living on less than your earnings, that you are more likely to be able to handle a regular monthly payment that you cannot miss.  It also means that you avoid expensive mortgage insurance and you aren’t doing risky double mortgages in order to avoid said insurance.  Finally, it gives you more breathing room so if you do have to move and the housing  market shrinks or you need to unload the house quickly, you’ll have that flexibility.

#3.  There are a lot of other heuristics about how much of your income etc. to spend.  That’s more about *what* to buy rather than *when* to buy, so I’ll leave a nice link to No Trust Fund on the topic here.  But obviously if there are no housing units in your area in your price range but there are rentals, renting is what you should be doing rather than violating #1 and #2.  (You will still want to think hard about putting down 20% on a million dollar house if you aren’t sure you’ll always be able to make the monthly payments.  Maybe waiting until you have 40% will provide more peace of mind.)

Ok, so that’s when not to buy… how about when to buy?  When is buying better than renting?

Luckily there’s a calculator for everything on the internet, and this calculator from the NYTimes is teh awesome.  It will tell you which is a better deal in your circumstances, renting or buying.  (Think of mortgage interest as equivalent to rent– if the mortgage interest is greater than rent for the same house, you’re losing money by owning and would be better off with that down payment in the stock market or other investments.  Well, mortgage interest and property taxes and HOA/Condo fees and upkeep.  Even with a paid off house there’s still annual expenses.)

However, there are also intangibles to home ownership.  Some people want to paint their own walls.  Some people hate having to deal with maintenance.  And so on.  These intangibles will tip people one way or the other even if the money doesn’t work out that direction.  Note that if you decide to become a permanent renter, you need to increase your retirement savings to make up for future housing costs and the lack of forced savings that is the mortgage principal.

Note that the when *not* to buy is there to guard you against really heavy negative shocks.  It’s about how to guard yourself from what can be a pretty bad risk.  The when *to* buy is less about risk and more about getting a better deal.  So if the intangibles are important to you, then you can put a price on them and even if the rent vs. buy calculator comes out against you, so long as you can safely handle the payments etc. you can still buy and be better off.  But you should still follow the when not to buy heuristics in order to stay safe– if the intangibles are important, then you need to save more money.

So readers, when did you know it was time to buy or to keep renting?  How do you make these decisions?

We love ice cream

LOVE IT.

Also gelato.

#1’s favorite is anything chocolate with nuts.  Though she loves many many other kinds of ice cream.

#2’s favorite is coffee ice cream, with kahlua and chocolate syrup on top.

#1 notes also that she loves real whipped cream.  And chocolate syrup.  Ooh, and she’s been jonesing for a turtle sundae since she left the midwest… at some point she’s just going to have to roast and salt her own pecans.  (Update:  partner is a dream boat and I am the luckiest woman in the world.  Happy satisfied #1.  Sticky syrupy kitchen…)

Do you like ice cream?  What’s your favorite kind?

Posted in Uncategorized. Tags: , . 47 Comments »

Adventures in cloth diapering

With DC1 we got a gift of newborn-size g-diapers.  They were a pain to use and leaked.  So we didn’t use them.

We flirted with cloth diapering more in earnest around the time to start potty training.  On the recommendation of a friend, we used Fuzzibunz pocket diapers, size medium.  We had 6 of them and used them pretty much on weekends (since we didn’t want to bother daycare) and sometimes evenings.  When DC1 was completely potty trained during the day and had grown out of the mediums, we bought 3 size larges for night and some insert doublers.

Fuzzibunz were ok.  A bit of a hassle compared to disposables, but not too bad.  We swore we would cloth diaper DC2, but only after poo got solid.  It is much easier to remove solid poo.

Fast forward several years.  And me being sick of emergency late-night Target runs, but unable to buy in bulk because DC2 grows out of a diaper sizes in an unpredictable manner.  (We seem to have settled on size 2 for a while at this point, but who knows how long it will last.)  I figured if we had some cloth diapers in reserve, we could at least wait until morning to run out to the store.

Cloth diapering technology has improved dramatically.  After a bit of internet research, we decided on BumGenius All-in-one (organic, though really I just cared about the AIO part).  These are one size fits all by way of an ingenious snap system.  Instead of being pocket diapers, they have two layers of inserts sewn on the inside, but in order to enable relatively fast drying (80 min in the dryer in our experience), they’re only sewn on the top and bottom edges of the insert/diaper and there’s space between the diaper and the insert while washing and drying.  Except that snaps are a bit more finicky than velcro (but last longer), they’re really no more difficult than disposables in terms of ease of use.  Even with non-solid poo.  (Though note:  we are breast-milk only so the poo doesn’t smell bad… it might not be this easy with formula poo.)

After use, we throw them in the washing machine.  Once we’re ready to do a full load of laundry (or we run out of cloth), something that happens once every day or two, we rinse them on cold.  Then we throw in the rest of the laundry, add soap, and do a regular cycle.  We dry for 60 min, clean out the lint filter and any obviously dry laundry, then dry another 20 min.  Not much more effort than our regular laundry cycle.

I had originally bought 6, just for emergencies, but they were so clever and so nice to use, I got another 6, for a total of 12.  We don’t make the mother’s helpers use them and we don’t use them at night (since we’d rather DC2 sleep than wake us up demanding a diaper change).  So DC2 still goes through ~48 disposables each week, or half a box of the size 2s (ze is ahead on the poo curve on top of being a hearty pee-er).

Anyhow, cloth diapering technology is really amazing these days and it’s gotten much easier to use.

We were not paid for this post and neither Fuzzibunz nor Bum Genius knows we’re alive (if they did, that would be kind of creepy).

Have you or has someone you love tried cloth diapering?  How did that work out?  Any favorite brands or tips?  (Alternatively, have you ever wondered why parents with young kids talk about poo all the time?)

Scholastic Dilemma

The second grade teacher said she’d totes do Scholastic, just like the K teacher did last year.

I tend to drop somewhere around $200/month on Scholastic when we get the flyers.  Otherwise I don’t generally buy books any more.  (People buy books for me from Amazon.  I’m kinda itching to buy some myself.)

DC1 has really gotten into a lot of the series I’ve bought from Scholastic.  The Magic Treehouse books have been read 2-3 times, as have the A to Z mysteries.  Ze’s really into mysteries now, so ze devoured Cam Jansen and Jigsaw Jones and Nate the Great, even though they don’t take very long to read (I think 20 min or so for the Cam Jansens).  Ze really wants the Calendar Mysteries and the Patriotic Mysteries (or whatever they’re called) by the same author as the A to Z mysteries.  And, you know, more books.

Ze still has plenty of books ze hasn’t read, it is true.  Even books at hir reading level and (in theory) interest level, though no more mysteries right now.

What have we been doing instead?  Saturday mornings while DH and DC2 snooze, we hit the library.  They don’t have more than one copy of most anything and generally stuff is checked out, but DC1 has been finding things to read in hir series of interest, even if out of order.

So, the dilemma– should I ask the teacher when we’ll be getting Scholastic flyers?  As soon as we get a flyer I will start spending large sums of money because I’m a total addict.  I want to buy more books, and I wanna buy them cheap.  (And there’s totes still room in DC1’s second bookcase.)  But also… each month we delay that’s $200 or so I don’t spend.  This year we can afford my habit.  Next year, maybe not.

Link love

We may not have been able to answer that question about how much a master costs, but here’s an article on how dominatrixes (dominatri?) pay their taxes.  Spoiler:  same as most small businesses.

Cherish the scientist talks about the problem with men telling her what to post and not post on the internet.

Unladylike Musings with a reminder to give yourself some TLC from a hot guy.

Hush is seeking advice on school choice for her five year old.

Scicurious answers the question of why walnuts are shaped like brains (well, not really).

A cute video of Big Bird on SNL.  Warning:  painful avian puns.

The Atlantic refuting the “economic proof” that Ryan’s plan works.  (I’m not sure what to think about the fact that I’ve had pleasant conversations with both economists mentioned).  I like the way that this article points out that just because an economist says, “under these assumptions the plan works” doesn’t even mean the economist thinks the plan works (or if he does, that other economists will agree with the assumptions)!  But politicians will take whatever they can get and twist it.  Too bad we don’t use adjectives, because then we could say “heroic assumptions.”

Because you need something sweet to clear out your mind after thinking about politics, here’s some lovely Sunday Sweets from Cake Wrecks.  Warning:  you will get a song stuck in your head, but it’s a good song and you won’t mind.

We were in this week’s carnival of personal finance.