This article originally published in The Northern Daily Leader on 1 September 2012.
When my wife and I became parents, one of the unbudgeted items of parenthood was the purchase of a suitable car. I tried to make the case that my ute and Liz’s Nissan were fine, it was just going to be a bit of a squash with all of us in the ute’s front seat, but Liz was having none of it. Truth be told, I didn’t mind getting an updated car. My ute was old enough to legally vote and had all the reliability of a Collins Class submarine. Even though the new child-friendly car had to be an unexciting station wagon, at least it was likely to actually get me to my destination. Not long after taking delivery of the box on wheels however, it was made clear to me that the new car was to be used only for trips which included Jack’s company. There was no way I would be using the car to drive to and from work, unless I fancied Jack tearing up my office all day too. And so I was relegated to using my wife’s car as my daily driver.
It wasn’t long however before I began to tire of an 80 km/h top speed and honorary membership of Australia’s Most Boring Car Club. And so a few weeks ago I suggested to Liz that we sell her car and buy something else, preferably one with a towbar, 4×4 and a pop-top tent. Liz seemed open to the idea, until I told her what we were likely to get for selling her car – not a lot. Personally I wasn’t too concerned, I had no real attachment to her car and I was looking forward to driving something a bit more masculine. Liz was the complete opposite, adamant that her car was worth at least double what we were likely to get for it at a local car dealer.
Fortunately for Liz, I was able to explain to her why she held such a misguided opinion of the value of her car – a well-known behavioural trait known as the endowment effect. It means that we usually demand a higher price to sell something we already own, as compared to the price we would pay to purchase the item in the first place. This is a danger for investors too – it’s easy for us to overvalue investments that we own, simply because we already own it. Whether it’s a car or a share in a company, it isn’t worth anything extra just because you own it. Unless the owner happens to be pregnant, in which case forget the rules and just agree. Sometimes an old slow Nissan is the perfect car.