Question

Explain the implicit cost of ownership and why people tend to undervalue the opportunity cost of their possessions. Give an example from your own life where you did this. Do you see any other evidence besides the 4 concepts (overvalue sunk costs, undervalue opportunity costs, forget fungibility, time inconsistency) discussed in class that suggests humans have a tendency to behave irrationally?

Answer 1

Implicit cost of ownership is the opportunity cost lost because whenever a good is bought then its cost has to be paid. And the owner could had spend this money on something else which could have given a different benefit if spent on something else. People tend to undervalue opportunity cost mostly in cases when the cost is not a monetaray cost. In those cases people are not able to calculate or judge the opportunity cost correctly and tend to undervalue them.

Other than the given 4 reasons, another reson for irrational behavior is cognitive ability of a person which gives person the decision ability and the urge or temptations which makes person to take irrational decisions.