Four new episodes of The Gilmore Girls premier on Netflix today. My daughter Grace - who was not yet two when the original series wrapped in 2007 - has been fast-forwarding through seasons six and seven, hoping to catch up in time for the reboot.
I've had mixed feelings about Rory, Lorelai and the rest of the Stars Hollow set over the years. My wife Lisa got me interested early on, and at first, I loved the fast-paced pop-culture rich dialogue. But to be honest, I'd lost interest in the Lorelai-Luke/Rory-Dean saga by the spring of 2004.
I kept watching though. Every Tuesday night I jumped onto the couch with Grace's mom, hoping there'd be some unforeseen plot twist to drag me back in. Maybe Luke would ditch the flannel shirt and buy a cell phone. Or Babette Dell would be elected mayor so that the amazing Sally Struthers (ex of All in the Family) would finally get something more than a minor recurring role.
What's all this have to do with today's economy? Well, my loyalty to The Gilmore Girls was a neat illustration of a useful economics concept called sunk cost dilemma. I couldn't stop watching for the same reason business leaders resist discontinuing failed product lines, or consumers hesitate to sell a car after too many trips to the repair shop.
I couldn't get my head around stopping my project (watching the Gilmore Girls) because the promise of future success (less conventional storylines) remained intact for me. I knew the show wasn't likely to get any more interesting, but stopping meant admitting that my sunk costs had been wasted.
The flip side of sunk cost dilemma is opportunity cost. That's what I gave up by continuing to watch the show. There was almost certainly a better use for the 153 hours I committed. Just as the business leader could invest her resources more productively and the consumer could purchase a more cost-effective mode of transportation. This is another key economic concept. Resources will always be limited, so the choices we make about how to employ them are important.
All of this has obvious applicability to investors. Anyone who has purchased a stock, only to see that security drop sharply in value knows how emotional an experience that can be. If your purchase price was $100, and that investment drops to $75, it is difficult to sell because that means accepting the $25 loss. As long as you hold onto the investment, the losses are only on paper (which is to say they're abstract rather than real).
But if that investment has dropped in value because of some meaningful event - say for example the company that issued the stock has lost a major customer - then by holding onto the investment, you're giving up the opportunity to invest your $75 into a stock or bond that's more likely to rise in value.
Speaking of which, I'm out. If I hurry home, we can probably squeeze in episodes one and two tonight.
Kevin Press is assistant vice-president, market insights at Sun Life Financial.
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