Overvaluing Intangibles, Part 1

If you're anything like me, you watch Pawn Stars (because you're interested in historical items) and you watch Hardcore Pawn (because you're a horrible person).  One of the defining moments in both shows occurs when people walk into the pawn shops wanting to either sell or pawn items, and they inevitably think that their item is worth a ridiculous sum of money.

"So, all you'll give me for my seal is a
swift kick in the pants?
I guess I can do that."

Sometimes the object is worth as much as the people expect, but most of the time it isn't.  Even if it is worth money, because the pawn shop needs to make money when they resell it, the pawn shop gives the seller a necessarily lowball offer to ensure that money can be made.

In the first place, in this age of eBay and Amazon, why on earth do people still insist on selling to pawn shops?  If you have something of value that you want to sell, SELL IT YOURSELF TO MAKE MORE MONEY.  This is called the American Way.

In the second place, when something isn't as valuable, why do people assume that it is?  The answer to this lies in an object's intangibles.  This can also be known as sentimental value that we tend to place in items that is above and beyond what those items are actually worth.

As a point of comparison, consider Tim Tebow.  The guy is not your normal quarterback in that he can't throw two consecutive good passes to save his life.  Still, he was a first round pick in the NFL draft because scouts really talked up his intangibles.  He isn't a partyer.  He is a natural leader.  He says his prayers, minds his manners, and chews with his mouth closed.  Because of these things, certain coaches in the NFL ate him up and drafted him (arguably) much higher than he should have been.  He began starting as a quarterback last season, and he lead the Broncos into the playoffs even though nearly every person who comments on football considers the guy a sub-par quarterback.

Will Tebow's intangibles eventually translate to a Broncos Superbowl victory?  Only time will tell, but in my opinion, you'd be better off engaging in a land war in Asia or going against a Sicilian when death is on the line than betting the Tebow will lead the Broncos to a Superbowl.

Not Pictured: Wallace Shawn.

In a similar way, we overvalue objects that we've had with us our whole lives.  Sure, you've had that clock that your great-aunt Mildred passed down to you all your life (so it's worth a lot to you), but the truth is that it's not as much of a clock as it is a piece of plywood with (most of) the numbers between one and twelve painted on it.  Even though you may value this item intensely, from an objective standpoint, it's not worth a whole lot.

Make sure to come back later this week to see how this mindset costs you money (even if you're not a pawn shop regular).

Photo 1 from Thomas Shahan 3.
Photo 2 from Jerf Kern.

This post was featured in the Carnival of Personal Finance #350.

An Analysis of a 2 Broke Girls Episode

If you're interested in personal finance and you haven't been watching 2 Broke Girls, what in the world is wrong with you? that's probably okay.  However, the show, at least tangentially, revolves around ideas that have a lot to do with money, and, for this reason, here's a post about it.

For those unfamiliar with the show, the two main characters are Max, a gruff, sassy waitress who makes cupcakes for (mostly) fun, and Caroline (pronounced Care-oh-line, so you know she's uppity), a saccharine-sweet, suddenly bankrupt daughter of a Bernie Madoff-like character.  Despite the tough-girl front that Max puts up, you can tell that she, slowly and grudgingly, is coming to like her new friend Caroline, mostly because every episode seems to feature Max feeling slighted by something Caroline does, Max writing Caroline off for being like every other person who has ever mistreated her, and Caroline making a GRAND GESTURE that gets Max to like her again.

Pawn Stars

This show on A&E simply baffles me. That isn't to say that I don't find it interesting and even compelling, but I'm continually baffled by it. For the life of me, I can't figure out why people would go and sell their items for less than the item is worth, especially when there are so many opportunities to obtain a better return. Have these people never heard of Ebay?

It would be one thing if the owner were taking advantage of people, and the customers were selling their belongings with no idea of the worth. But every show, the pawn shop owner calls in an expert who gives a quote on what the item's value is, and then the owner lowballs the customer to, generally, somewhere around a 50% reduction in price. If memory serves, I believe I even saw him lowball a guy on a big chunk of gold that had likely been recovered from a shipwreck (pirates!), an item that many people would have paid much closer to its face value for.

But these baffling items I can take. What I couldn't take was on last night's show where a guy was trying to sell his 1986 Buick Regal that he had pimped out. The commentary suggested that the man had probably spent the better part of $10,000 on the paint job for the car and various other improvements. Nevertheless, the man was only hoping to get $2,000-$2,500 for it! While the car was certainly not meant to be an investment, and while there is certainly something to be said about spending money on things that you like and enjoy, what a huge cash drain! And for the man to simply acknowledge that it wasn't worth the money he had put into it was fascinating. That is a 75-80% loss on investment money (if not more; it wasn't clear if the original vehicle price was factored into that ten grand)!

As a comparison, particularly in the last year, many sound mutual funds have had amazing gains into the double digits as the economy slowly trudges out of the Great Recession. Some of the more modest gains I've been seeing in my research on mutual funds lately have had a 9% gain in the last year. If the car seller had put that ten grand into a mutual fund a year ago, he would now have $10,900 sitting the bank. When you consider that he only ended up selling the car for two grand, that's $8,900 that simply evaporated into thin air. Of course the flip side is that he could have invested in Citigroup before the crash, and now be left with pennies on the dollar (though I believe it's making progress towards improving its stock price in specific ways).

I suppose it just comes down to what you value. Me, I don't want to work forever, so I'm trying to get my retirement accounts squared away. How about you?

Disclaimer: I currently own shares of C, and I plan on owning more in the near future.