According to financial theories, over-investing denotes the method of more investment on an asset than the actual asset value in the open market. The practice of over-investing is most often noticed in case of automobiles, houses and trailers.
If the owner of a house performs some add-ons or renovations to his house to the extent that the investment is substantially higher than the market value of other types of homes in that location, then it may be mentioned that he has done an over-investing in his house. The house will be devalued due to the neighborhood effect simply due to the reason that the value is less in comparison to the actual investment amount.
If a person purchases an old car for US$ 2,000 and he makes additional expenditures worth US$ 2,000 on repairing and maintenance, although the old car would never be valued higher than US$ 3,000 in the open market, it is assumed that he has over-invested by US$ 1,000 on the car.
Usually, over-investing happens in case of assets that are partly consumption commodities and partially investment goods. Cars and houses are considered as investment goods simply due to the reason that the buyer anticipates that he will be capable to sell the asset again in future period. They are also regarded as consumption commodities because the possessor of the asset is capable of using the asset at the time of owning it. This happens due to the consumption constituent that propels people to over-investing. They implement those criteria that are different from strictly financial criteria at the time of taking the decision about the amount of investment on the asset. They are ready to pay higher amount on a car or house in comparison to its value in the open market since they obtain a number of advantages by utilizing them. The concept of over-investing is typically applied in personal finance.
Last Updated on : 1st July 2013