Teh Chad

How much would you pay in opportunity cost?  How much would a visionary pay?  I might be on to something here.

Is the difference between the poor and conservatives versus the risk-taking rich really simple objectivity?

In a book that I’m destroying, an interesting thought has spawned.  I’m sure it is not original.  Does “free” blind an entrepreneur?

Experiments were carried out in a couple of different places by behavioral scientists.  I’ll try to attempt a reproduction here.

Given the opportunity to buy a usable good, say a car, a choice is given.  A Chevy or a Porsche.  Now let’s assume for a second that you have sufficient funds to buy and maintain each without suffering at all.  Let’s also assume that the Chevy costs $15k and the Porsche is $80k.  Quality will come down to the car at the time of purchase.  All else equal.  Which one would you choose?

The results of the survey suggested that people would choose the Porsche by a ratio of about 2.3:1.  $65k is a pretty big margin to pay.  They are both forms of transportation.  Maybe the Porsche is more fun?  I digress.

What if…  the prices were both reduced by $15k.  All else equal.  The Chevy is now free.  Given that we still have the same inclination towards the “fun” car, would we not expect the same ~70% to buy the Porsche?

Survey says?  No.  The ratio is just a bit bigger at about 2.5:1.  What is it about free that makes us give up something that we desire for something that simply does the job?  The utility gained from each car is still the same.  The Porsche is still exactly $65k more than the Chevy.

Does “free” blind us to that particular option?  Does it push us so far away from the others?

Going a bit deeper.  What if we were given a dozen Chevys and asked a couple of questions…  You can trade your cars for other cars: 3 Chevys for a Porsche or all of your Chevys for a new Farrari.  What would you do?

Research shows that people don’t want to lose what they have.  You may go for the Farrari, but most people would trade for the Porsche and keep their remaining Chevys.

Take a step back for a second and think about someone you know who is an entrepreneur.  What do you think they would choose?

The Chevys to me are not worth that much.  A Porsche would be cool, but what am I really gaining?  Am I gaining anything?  Am I losing in the deal?

I contend that an entrepreneur would see the sale value of each of the cars and gladly choose the Farrari.  Hang with me here.

The Chevys will go down in value and not at any slow rate.  The Porsche will have a decent resale value and it wouldn’t be a bad choice.  Consider that the trade is $45k worth of cars for an $80k car.  Even if you don’t get full price, you are still making money.  This is where most people go.

I contend that the entrepreneur will trade for the Farrari.  They might see that to sell the Italian car would net them well into $300k and quite possibly more.  This is very profitable considering that they just traded $180k worth of cars.  How objective are the visionaries?  Can they see past the get-the-job-done options?  Is this the definition?

Epiphanys do happen at the strangest times.  Also, you can contact me for the book title – I’m really enjoying it.

I think it’s funny how so many people fail and they think ergo that they must not be “right” for whatever it is that they failed at.  It’s as if any of us are only “right” for one given thing!  HAHAHA

On the note of taking a risk, I’ve really been kicking around the idea of starting a small business.  This business would still have my written mission statement: helping small business.

One client is seriously interested and another is slightly, but it would require a ton of time spent for the framework to be built.  It would also require money.  The money required would be to register the LLC and pay for the initial advertising campaign.  The opportunity cost is the money and the time spent.

The initial shot will be taken.  I’m already working about two hours each night during the week and a few more on the weekends.

Okay, my thoughts.  The biz: To register an LLC (seems the best option for taxes and liability) with the state of Colorado is about $50.  To do this, I need an attorney to do it.  Their fees can range from pulling strings to $500 for their time.  This legitimizes the business and opens the books to track where things are going.  Labor: With one client signed on, I have something to work with.  Working with their site will allow me to document the whole process as I go.  Doing this labor on a commission basis is worth what you decide it is until your first sale.  I’m counting it a learning experience.  SEM investment: This will likely be needed to boost things until the site has been established with lots of back linking.  This is also what you decide it will be.  The avg cost for google ad words for the said client is about $5 per click with Facebook at around $0.50 (thus making sure we get the clicks; ie these can be adjusted).  Say we want 100 clicks/mo with 70% of those coming from google, a conservative budget might be around B = .7C($5) + .3C($.50) for each budget.  We want 100 clicks so thus: B = 100(.7*$5 + .3*$.50).  B = 100(3.5 + 0.15) and our budget is ~ $365 for the 100 clicks.  Say we have a 5% (and this may be an overestimate) conversion rate: each sale costs us $365*0.05 = $18.25.

So our total: LLC $50, lawyer’s fee (guess at) $100, monthly initial marketing budget $365 along with labor.  Now we can’t guarantee a sale in the first month (or two) so let’s estimate for 3 months($1095 marketing) and a couple of lunches with the client or possible clients($200).  New total will be closer to reality at $1445.

That’s a good chunk of change!  However, that isn’t all we are risking.  An accountant would stop there.  An economist would not.  Economists look at a thing called opportunity cost.  I’m not going into huge detail here with it, but I’ll summarize.  My other options are getting seriously back into poker (which is good money, but inconsistent), go back to school, or find another endeavour to try.  This will take the time away so that I cannot do any of those things, though I will try to play poker at least once a month for fun.

Oh the things that float around in my head….