* warning: I use the word “shit” in this post a lot. I apologize in advance, but there was never a more perfect word to use in the following topic of discussion*
On my way to gaining a couple of degrees in the area of finance, one of the first and most fundamental things I was taught was the economic concept of “sunk cost”.
“Sunk cost” is money you've already spent and cannot get back no matter what. And a rational investor, as economists say, will completely ignore sunk costs when making decisions because the money is gone no matter what action is taken next. And the “sunk cost fallacy” is thinking that investments you have already made in something obligate you to finish them. You buy tickets to a movie, but don’t walk out halfway through even though you hate it because you’ve already spent the money. Even though
you’ve already spent the money, you continue to decrease your collective happiness even further by sitting through the film because
you’ve already spent the money.
This is easy to understand. I’ve been trying to analyze how I forgot this simple concept with the ownership of my last vehicle.
A bit of history: I’ve owned two Fords, a Chevy, several Honda’s and a Jeep. My first Ford was a piece of shit from the get go, but back then I was young, broke and had the time and ability to do a lot of my own car repairs (it helped that cars were not so complicated then). Given how much experience that car gave me, I became very capable, but fortunately, a red-light running truck quickly relieved me of this headache. My second Ford, which I drove through college, was as likely to leave me on the roadside in some small town in the middle of the night as it was to get me to my destination, which it in fact did more than once. At one point I poured what amounted to liquid rubber balls in the radiator just to keep it going. The Chevy lasted only a short while, and cost me nearly as much to repair as it did to buy. I finally bought a Honda, and for many years, through a string of Hondas, have never had a single major repair bill. In fact, the first one I bought – a 1996 Honda Accord – had over 350,000 miles on it and only recently met its demise courtesy of my sister, who used it to play pinball with on an icy Texas highway (hope you’re feeling better, sis). Had it not, I could have sold it for as much as I sold my Jeep, six years newer. After my first one, I swore never to buy another American car.
That all changed in 2002, when despite reading all the negative customer reviews, and against the advice of others who’ve owned them (or any other product manufactured by Chrysler), I bought a Jeep Grand Cherokee. I convinced myself that surely my luck would be different, but the fact is I just wanted it. I thought they looked great, had great off-road capability and I loved driving it. When it wasn’t in the shop, which wasn’t often. The truth is, that while they looked good, under all that shiny sheet metal and behind that luxury interior, they’re Chryslers – quite possibly the most poorly made automobiles on the road.
It’s quite remarkable how big a piece of shit it turned out to be. It stuns me even now to think about it. Not only is there not much on this vehicle that hasn’t failed yet, but the all-in cost of driving this vehicle the last 8 years is almost equal to the cost of buying a couple of Honda Accords., both of which would still be running and worth far more than a functioning Grand Cherokee. In addition to that, my love of driving it, coupled with my anger at paying for its upkeep, literally caused me to cease thinking rationally about it, and I did what rational investors should never do: I threw good money after bad.
The first step toward preventing sunk costs from mushrooming into super sunk costs, is to understand that the original idea was not a good one. In other words, admission of a mistake is required of the decision maker. That is often easier said than done. Mandy understood this as much as two years before I did, and told me as much. Every time I had something new go wrong, her response was “It’s a piece of shit. Get rid of it.” Of course, if you’re in the middle of it, it's hard to abandon projects into which you've poured time and money, especially when you've signed on to a course of logic - “Look, if I fix it, it will be like brand new. I owe nothing on it, so fixing it is cheaper than a new car payment. “
I said this through fixing the electrical system, the CD player, the front axle (x2), the rear axle (x2), replacing the air conditioner, the transmission, the rear-end, etc.
The rational mind would have said, “screw it, it’s a lemon - get rid of it”. But I hung in there, hoping I had fixed the last problem it had. But then one day, as I was driving home, I heard a knocking in the engine. Uh oh. The mechanic said he didn’t know exactly what was wrong with it, but it needed a new motor. I can get you a new one for $6,400. I got a second opinion from Jeep (who I had long since ceased going to for repairs, since they were such scam artists), and got a similar answer. I should point out that the Jeep, with a fully functioning engine, was not worth $6,400, so effectively the car was worth $0. And there were no guarantees that something else major might not go wrong next (although what it could be, I have no idea - I fixed everything on this car). Even then I was temped - with a new engine, it would be practically brand-new!
By the time I got home, however, I finally came to my senses. I dragged out a hose and bucket, washed it, vacuumed it, and put it on Craigslist for an absurdly low price, hoping someone would haul it away. I had it sold by the next morning, underestimating the number of people who knew how to fix engines. (by about a hundred, judging by the phone calls and emails).
If I had followed the sunk cost concept, and my wife’s sage advice, I would have sold this car while it was still worth book value, not spent more than it’s value in the subsequent years to repair it, and admit defeat by writing it down to near zero value.
It was a costly lesson, but one I don’t intend to repeat. Especially by buying another American car anytime soon…
