So You Think You Made Money, Huh

Let's see if you had a profitable outcome after all.

Suppose you just sold your collection of antique cuckoo clocks. It fetched $8,500 of which you paid $500 to the broker/auction house leaving you with $8,000 in net proceeds.

Did you make money?

Well, we need more information. How much did you pay for the collection?

Suppose you paid $5,000 one year ago for it. Therefore, you made $3,000 profit, right?

Well, did you store it for free?

No, not exactly. Upon purchasing it, you drove it to your home and put it on display in your living room.

There was obviously a little transportation cost in there, and there certainly was some storage cost. But maybe those costs were offset by the enjoyment you had in displaying it.

So you made $3,000 profit. That's a pretty good approximation as all other details would probably be minuscule.

But the original question, "Did you make money?" has a little more embedded within it.

What was the opportunity cost of that $5,000 that you originally paid for the collection? You could've gone on a nice, little vacation with it, or you could have invested it among a myriad of other options.

Following your sale you can go on an $8,000 vacation as opposed to when you made the $5,000 purchase. So if that's the best alternative, haven't you done pretty well?

Perhaps, but there's a time value of money to be considered. That isn't just the interest rate. There could be relevant factors like who you could've traveled with or where you could've gone versus who you can travel with now and where you could go today.

If the economy had been in a severe recession a year ago, travel might have been a lot cheaper then than today. Therefore $5,000 might have bought a lot more vacation than $8,000 buys today.

Suppose investing it was the next best alternative. And what if your investment options as shown by the way you invested all your other funds at the time was in diversified stocks that doubled in value over the past year. In that case the $5,000 would be worth roughly $10,000 today. Even after taxes, you probably would have been better off with the stock investment from a strictly monetary point of view.

Let's change it up a bit. Suppose that one year ago you inherited it from your grandfather. It was a very precious collection to him. He had collected it over many, many years and had much joy from owning it. Therefore, when it came into your possession, you got it essentially for free.

By the way, I'm sorry about your grandfather's passing, but that's not a relevant cost for us to consider. What is also not relevant are how much he paid for the collection and how much it cost him on net to store it all those years.

Yet now we need to consider the changed circumstances because it turns out you really didn’t have a strong affinity for it. You kept it out of a sense of obligation to your grandfather even though it really didn't bring you any joy. You didn't display in your living room. Instead, you put it up in your attic and largely forgot about it until this opportunity to sell it came along and your emotional feeling of obligation had passed.

We could quibble about the storage cost now being a little bit higher, but it is still probably a rounding error compared to how much it has sold for. So what is the relevant comparison today? Actually it's pretty much the same. If we keep the assumption that it was worth $5,000 a year ago, all of the rest of the analysis as before will follow.

Now comes the really hard part. To some degree, you liked the collection. In the first case, you really liked it. By this I mean you liked it considerably more in the first case—not necessarily that you didn’t like it some in the second case. But it does seem in the first case that you liked it much more than the second. Even in the second case, there is a sense of loss when you give it up. And in the first case, that sense of loss is even greater.

This is much harder to put a dollar figure on. Although, you have literally done that, haven't you? By choosing to sell it you have demonstrated through revealed preference that you would rather now have $8,000 than the collection. How much more? Very hard for you to say and impossible for me to say—value is subjective.

By this I mean the value of the collection is subjective to you; in the case when your grandfather owned it, it was subjective to him, and likewise the money and what you can spend it on is subjective to you. It is really not for me or anyone else to say what you should have done.

I can evaluate based on a lot of the analysis above whether it was a good financial decision in retrospect. And we could've made best guesses as to the financially optimal decision ex ante.

Yet I would encourage you not to get too caught up in that. The best I can offer is that you should make the decision that is best for you letting only your own desires enter the equation. If it is a purely financial investment decision, allow yourself to go where the numbers take you. If that at some point feels wrong, consider if it is due to discovery of how much you really like the collection or if it is an emotional bias (endowment effect, emotional inherited obligation, etc.).

Don’t let your guesses at grandfather’s preferences override your own. Your grandfather wanted better for you. If it's a financial asset, we can do some cold hard calculations. When personal preferences and aesthetics enter, it naturally gets much fuzzier.

Be happy with your profit, and go reward yourself with a vacation. You earned it.