A few years ago I managed to nab a used Wenger Swiss Army watch off of eBay for $35. I really liked the watch since it was classic but not flashy (shown to the right) – and it didn’t hurt that it retailed for over $200! Recently it abruptly stopped working, and so I brought it in for a battery replacement. Unfortunately, it turned out the entire mechanism was burnt out and it would cost $50 to replace. Pay $50 to fix a $35 watch? Nah, I’d see what else was out there. I was actually considering buying a similar watch from Costco for $150 before I caught myself. I was being fooled by the sunken-cost fallacy!

What Are Sunken Costs?
A sunk or sunken cost is something that has been spent and cannot be recovered. Since this is the case, economists argue that such sunk costs should not be a factor in one’s decision making. The classic example is the movie ticket decision (adapted from this Wikipedia entry).

Let’s say you bought a non-refundable movie ticket, but you later decide that you no longer want to watch the movie. Do you watch the movie anyway since you already paid for it, even though you won’t enjoy it? Or do you simply walk away and do something better with your time? Since the ticket was a sunken cost, a rational decision maker would ignore the fact that you paid for it already. In fact, you should act as if the movie was free.

A few more examples:

1. Clothes. You bought a pair of $100 shoes, but after wearing them around you find that they hurt your feet horribly. Do you continue to wear them anyway?
2. Consumer Products. Sometimes companies will continue to plow money into a project even though they know it will be a failure, simply because millions have already been spent on it. It’s important to know when to cut your losses. A historical example is the Concorde jet.
3. Investing. Many people hate selling their shares for less than they paid for it. However, once you’ve executed the trade, that shouldn’t matter anymore. All that should matter are the current prospects for the stock.
4. Human lives. This idea has even been extended to the Vietnam War and more recently the Iraq War, when the loss of previous lives has been used as justification for continued fighting.

But back to my watch story. I realized that it shouldn’t matter what I paid for the watch. The fact was that I could still get a working watch for $50, while replacing it would cost me significantly more. Nothing similar was selling for less than $100 on eBay, and a new one would cost at least $200. I went ahead and told the jeweler to fix my watch for $50.

Have you caught yourself worrying about sunken costs as well? You can also read about other ways that our mind plays tricks on us in Mental Accounting: Is A Dollar Always A Dollar?

For some reason, my friend received a postcard from Maserati offering him some Omaha Steaks if he came in for a test drive. You’d think buyers of $150,000 luxury vehicles couldn’t be convinced to do a test drive for $50 worth of meat, but I guess not. Anyways, I convinced him to go – and of course to let me tag along. 😀

I wasn’t really familiar with the car, but the Maserati Quattroporte does look sexy. You may have seen it on the HBO show Entourage. Designed by Pininfarina and engineered by Ferrari, with a base price of $110,000 it could almost be seen as a bargain… compared to the $250,000 F430 it was sitting next to in the showroom. Here’s a video review from the UK:

Deep Thoughts…
One realization I had while cruising down the road – caressed by supple leather and listening to the Ferrari engine – was that I was getting more comfortable in my own “financial skin”. Before, I might have felt self-conscious on going to this test drive. Now I don’t care what people think of me. If I really wanted to, I could probably buy such a car some day. But I already have my priorities and they are nothing to be ashamed of.

At the same time, I also started to understand that there is nothing wrong with someone who does buy such things. Sure, they might be mortgaging their future in order to look cool now. But they also might be successful people with a solid financial plan and also appreciate fine Italian cars. I asked the saleperson who the typical buyer of a Maserati was. While many people were business owners or corporate executives, he also said his last sale was to an 82-year-old government retiree who finally decided “what the hell” and bought something nice for himself. In other words, perhaps us frugal folks shouldn’t judge others either.

I know I’ve been guilty of this. To this day, whenever I see someone under 25 and driving a shiny new BMW, the words “paid for by the Bank of Mom and Dad” pop into my head!

It seems that my car troubles aren’t over yet. So the only financial thing I learned today was that AAA Basic only pays for the first 5 miles of towing. After that, it’s $6 a mile. What’s up with that? I won’t complain though, as a family member had AAA and not me and I think I still saved some money using the service.

I don’t buy AAA because my general philosophy on insurance is that you should only buy insurance for financial hits you can’t weather. I can handle paying for an occasional tow – or I can ask if others have AAA 😉

Two, count ’em two, of my old hard drives died last week. And this web site went haywire (multiple times). I had the major files backed up, but my need for a better backup system became apparent. Ideally, it would be free, automated, and online. So what’s out there? Here are the best options I found:

• Online Backup. The leader in automated, online backups seems to Mozy Online Backup. They have paid plans, but still give you 2 GB free with MozyHome Free. Another site, iDrive, also offers 2 GB free.. Transmission is encrypted, but security during storage may be a concern for very sensitive files. This isn’t really a concern for me, as I don’t have much sensitive stuff. Another downside is if this start-up dies, then so do your files. Recently, a similar site called Omnidrive shut down abruptly with little warning.
• Gmail via Gspace or Gmail Drive. – Use your 2GB+ of free storage with a Gmail account. Gmail Drive lets you use it as as drive within for Windows, and Gspace lets you transfer files using the Firefox browser. To automate transfers to Gmail is a bit trickier, but here is a guide at LifeHacker.
• FTP to existing server. If you have a web-hosting service, try combining that with Syncback Freeware to make an automatic backup system. You’re already paying for the hosting anyway, and most give you a ton more storage than you really need. (Another LifeHacker guide for Syncback)

Having good backups both directly and indirectly saves me money in the long run. I just need to invest the time to set things up now.

When we got married, we received some very nice cookware as wedding presents. Calphalon, non-stick, anodized, big bucks. But after years of abuse due to my poor cooking skills, my $50 frying pans are anything but non-stick anymore. So, yesterday I spent some of my holiday Amazon gift certificates on a Lodge 12-Inch Pre-Seasoned Cast Iron Skillet. (I also picked up a bond investing book and got free shipping.)

I know plenty of folks already have one of these, but I’m joining the bandwagon! This New York Times article Ever So Humble, Cast Iron Outshines the Fancy Pans outlines the many benefits well, but here’s a summary and my responses:

It’s cheap, durable, and lasts forever
Brand new, and even pre-seasoned, mine only cost $15. That’s a lot less than most fancy cookware, and you don’t have to navigate all the marketing ploys. You can probably pick up a slightly cheaper one secondhand, but I remember finding one a year ago at a garage sale and they wanted $15 for that too! Finally, besides the occasional re-seasoning, it should last forever as long as you don’t drop it on concrete or something.

You can cook at high temps without worry
I admit it, I like to fry a lot. But reports suggest that Teflon and other chemically-treated pans can give off dangerous fumes when heated to high temperatures. So you’re not supposed to pre-heat, sear, or use them in ovens. I look forward to searing my very first steak and then putting it straight into the oven to finish for a warm center. (Been watching too much Food Network…)

Just as nonstick when seasoned
From the article:

Well seasoned, it is nearly as nonstick as any manufactured nonstick surface and far more so than stainless, aluminum or even copper pans.

Sounds good to me. Seasoning isn’t even that hard – directions vary, but basically you just grease and bake. Purists will want to do it themselves, but to me having it pre-seasoned both saves time and doesn’t cost more. There a few small maintenance tips to keep the seasoning going – avoid steel wool, not too much soap, and keep it dry to prevent rust – but I think I can handle that.

All of my foodie friends and the vast majority of the Amazon reviews love their cast-iron. Do you? Anything else I should know?