"Sometimes I'll do something like buy a tool or hire a helper because it only costs $50 and saves me an hour of work; my hour is worth more than $50, so that's a good deal, right? I'm not so sure. I feel like that line of reasoning is just a way of rationalizing more spending, but I haven't quite found the flaw in it yet. "
The flaw is that your hour is not really worth $50. It's only worth $50 if you could realistically do something else at that exact time that would net you another $50.
Perhaps you earn $X a year and have Y waking hours, so you figure every hour of your time is worth X / Y, but that does not logically follow.
Also related is the fact that placing a dollar value like that on your time in this way is an oversimplification and doesn't take into account your happiness, health, and benefits to other people.
The classic experiment here is that a very large fraction of people will choose $50 now instead of $100 in a year.
It also explains why there are so many more people who will be 'starting their diet tomorrow' than there are people currently dieting today, etc.
February 19, 2013 at 12:36 PM
Anonymous said...
Super friend: this totally depends on the person and the money.
I work 40 hours a week at $X an hour. The last thing I want to do is work more. If you want me to work more, you have to pay me more than $X an hour.
Therefore my free time is worth more than $X an hour.
Exhibit A: me personally, you'd probably have to pay me something like 10X to give up my free time, because I already have a ton of money. But I'm fairly wealthy, so maybe not that representative.
Exhibit B: all the people who make time-and-a-half for overtime--they make more than $X/hour if they have to work in their "free time".
nothings: You seem to be confirming my last sentence.
Let's think about your assertions though. You assert that you are a wealthy person. Let's say you earn $100k/year (that may be low, it may be high, doesn't matter, I don't care how much money you have). So you probably get $30/hr after taxes. You are effectively claiming that after you come home from work, your time not working is worth $300/hr to you. Do you really act in a way consistent with this assertion?
If so, I would expect you employ, part-time, a housekeeper, a driver, possibly a secretary and accountant, and possibly other support personnel, any of which can easily be had for far less money than that. Do you?
The whole question of "how do I value my free time" is really complex.
For example, I sort of enjoy my work, I chose it because it's not awful. If I didn't care about enjoyment, I could definitely make more. So your baseline "zero enjoyment" value is the maximum amount you could theoretically make per hour.
If you were making $500/hour as a trader and decide you hate that and want to teach school and make $20/hour, what's your time worth? By making that decision you're effectively saying the difference in enjoyment level is worth $480/hour for you. You still might not want to do horrible soul-crushing work for any less than $500/hour.
Actually I think it's one of those issues where the real analysis is so complex that it's effectively impossible, and doing any approximation of it by equating your salary with time value does more harm than good.
cbloom: yeah, agreed, it's impossibly complex to analyze your decisions with that simple model; part of what I probably didn't explain that well with my comment about the 'oversimplification'.
"If so, I would expect you employ, part-time, a housekeeper, a driver, possibly a secretary and accountant, and possibly other support personnel, any of which can easily be had for far less money than that. Do you?"
This assumes that you absolutely despise cleaning your own house, and rather enjoy having strangers around that you have to manage. It also assumes that during the housekeeper time you can do other things that are highly enjoyable or profitable.
In fact I think I'd rather do it myself, so if I had a job where I didn't have enough time to maintain my own home and was forced to hire help, that would be a negative about the job and I'd have to make more to compensate.
February 21, 2013 at 1:28 PM
Anonymous said...
I would expect you employ, part-time, a housekeeper, a driver, possibly a secretary and accountant, and possibly other support personnel, any of which can easily be had for far less money than that. Do you?
I agree with Charles about strangers, in fact I hate dealing with strangers! So I don't do any of things. But I also spend nearly no time on them.
But, ok, I also agree that cost of free time is complicated. You can measure both how much people would have to pay you to give up more free time, and how much you would have to pay to gain more free time.
Unsurprisingly based on all sorts of varying human psychology things, those two numbers can be different even though logically really shouldn't be.
But in my case I can easily balance the high cost of hating dealing with strangers with the low number of hours I'm not spending money to save. I spend perhaps 1 hour a week on housecleaning tasks. I spend a couple hours a year on taxes, which is the only accounting I do. A driver would not save me a significant amount of time as I have a two minute walking commute from home to work, and for the only driving I do regularly, I have someone else in the car I talk to which means it's not time "wasted on driving".
"socking money away for the future has immense risk associated with it"
Can you explain this more? My understanding from the context is that there is 'immense risk' in saving money because inflation may eat away at the value of that money in the future. So what is the alternative? Invest only in stocks? Bonds? Real Estate? All of those have 'immense risk', as well. Perhaps your statement is nothing more than a tautology, every decision with regards to the future has 'immense risk' if framed in this manner. Or maybe I'm misunderstanding your point. From my perspective, paying off debts as quickly as possible and putting savings away in a high yield money market account is probably the least risky thing one can do with their money.
No, my point is about a more fundamental macroscopic thing.
The goal of money is to spend it (or use it without spending) to increase your total life happiness.
If you can spend $1 today and get a good total happiness return, and without high chance of negative future effects - the least risky thing is to spend it immediately.
Holding money always has risk that you won't actually get to spend it for happiness later, either because you die, or your income increases greatly, or you move to a commune, or the world financial system collapses, or who knows what.
My particular point there was that I believe there is a huge amount of uncertainty in the future of the world in general in the next 20 years. I think there are a variety of ways that after-inflation returns could be quite bad for a long time (eg. another recession or depression). In some of those bad possibilities it will be an advantage to have savings, sometimes not.
Interesting post: "Sometimes I'll do something like buy a tool or hire a helper because it only costs $50 and saves me an hour of work; my hour is worth more than $50" The tool and helper both have a hidden time cost. The tool requires unpackaging, setup time, and thought or experience to output good quality results. Similarly the helper requires that you communicate your needs and verify the helpers results.
Here are some additional possible negatives for the tool: 1) It will become obsolete over time. The rate of obsolescence depends upon the design of the tool. 2) It will wear over time. In fact it might break immediately; here you will lose time returning the tool. 3) It will take up space. 4) It could be dangerous to you, or someone else. 5) It might look like the right tool, but when you open it at home it is missing some component that you need.
Here are some additional possible negatives for the helper: 1) Often an hour of the helpers time costs you time. Example: If they work for an hour, communicating your expectations and seeing them met may cost you 20 minutes. 2) Trust part 1: Their work may be sub par, in which case you are required to spend more or correct it yourself. They may be less motivated, less skilled, etc. Ego affects this fear; most naturally assume they will do a better job than others, so the expected future quality of work is different. 3) Trust part 2: They may steal from you. 4) Trust part 3: Harmful behavior: They may learn something private, or even assume an offensive opinion - which then gets shared with those who know you. Less often they may physically assault someone in the home. 5) Trust part 4: They may be late, or not show up at all.
Note 1: In some cases hiring someone or buying a tool makes perfect sense. It's also possible for the helper to be more specialized and more skilled. And the right tool for the job will make an otherwise monotonous task go quickly. For example, before Myspace and Facebook people frequently created personal websites for themselves. Today most will give up a little privacy in exchange for a simple social media platform.
Note 2: Expense should be considered based upon your personal supply of cash vs the cost of the job. Your hourly rate shouldn't factor in unless you would actually work during that hour.
September 21, 2014 at 2:46 PM
I believe that most people (aka me) grossly overvalue future rewards when weighing the merits of various options.
I've been thinking about this a lot over the last fews days, and have come to it simultaneously from several different angles.
For the past month or so I've been going over my finances, reviewing my spending, because I'm not happy with the amount I'm saving, and I'm trying
to figure out where the money is leaking. Obviously there are big expenses like cars and vacations, but those I've budgeted for, they're
not the leak (*) (**), but there's still a large general money leakage that I want to track down. It turns out a lot of it is buying stuff for
the house or for productivity, stuff that on its own I can justify, but overall adds up to a big waste.
A lot of that waste are things that I tell myself will "pay off someday". Like I need some rope for around the house; hey look it's
a much better deal if I buy it in a 500 foot spool. I'll use it eventually so that's the better buy. Or, I need to set a bolt
in concrete; sure a hammer drill is expensive, but I'll use it the rest of my life, so it will be a good value some day (better than
renting one for this one job). etc. Lots of stuff where the idea is that in the long term it will be a good value.
Now I certainly haven't hit the "long term" yet, but I can already see the flaw in that logic. There are lots of reasons why that
imagined long term value might never come. I might never wind up using the stuff. It might get damaged over time from sitting, or
flood or who knows what. I also essentially pay a tax to store it, having stuff is not free. I pay a tax on it any time I move.
Maybe I won't want to do DIY in the future and will just hire out the jobs and so won't use it. There are a lot of costs and uncertainty
about this future value which make it much less valuable than it naively appears.
Perhaps computer stuff is an even easier example; like I sort of need a USB hub; I could live without it and just
unplug stuff to make room depending on what device I want to use at the moment. You could easily convince yourself
that the value is high because "even if I don't really need it now I'll use it someday". But of course there's
any number of reasons why you might not use it some day.
(* = aside : expensive cars actually aren't that expensive; if you're careful about how you buy and sell, and look for cars that are on
a pretty flat part of the depreciation curve, you can get a "$100k car" that actually only costs $5k a year. That's not really a big
expense in the scheme of things. However that also doesn't mean it's free; the big cost is the time spent buying and selling; if you
actually want it to be low cost you have to spend a lot of time on the transaction to get good value, and for people like me that's
excruciatingly painful; for people who like wheeling-and-dealing, they can do pretty well, getting almost free stuff that they are
just holding temporarily between sales)
(** = more aside, and actually there is a spending leak that I have that's associated to cars and vacations; I, like most, and perhaps less
than average, fall prey to the sunk cost
fallacy. The sunk cost fallacy is the idea that you've spent a bunch on something, you should stick with it and spend some more. Like I've
spent this much to go on vacation, I shouldn't cheap out on the dining or whatever. Or I've got an expensive car, I should buy the expensive
tires. But that of course is not true. Each decision should be evaluated independently for its value; the fact that you have a large sunk
cost only matters in that it changes your current situation. You don't keep chasing your flush just because you're already called some big
bets (though obviously your past calls do affect the pot size which affects your current decision)).
Of course home improvements are a classic of false future value. I'm not foolish enough to think I'll get any resale value benefit,
but I do fall prey to thinking "I'll enjoy this for many years" when in fact I might not.
I was thinking about buying a really good mattress that's supposed to last 30 years vs one that will only last 5. In theory the long-life
one is a much better deal, but there are any number of reasons why that might not be the case. It might not last like it's supposed to;
you might pee and poo on it; you might want a different size mattress. By making an "investment" what you've done is commit yourself to
something, you've removed flexibility, which is a cost.
Of course if you ever decide you want to travel the world and live in apartments again, all the buying of stuff is a big liability.
Getting away from just "accumulating stuff" now :
I've been thinking lately about my career arc. All through my young-adulthood I was carefully building up my value as a software development
employee. I was improving my skills, improving my profile, networking, all that stuff, going up the career ladder. During that time I
was not getting paid particularly well. I took jobs based on them being good opportunities for my larger career, not for their immediate
financial reward.
The problem is that the big payoff never came. When Oddworld went under I was at the point where I could have moved on to CTO-level jobs at major
studios, but I decided I didn't want to do that. The stress was ruining my life (and various other things that I've blogged about back then).
The point is that this "future value" I had been building suddenly became zero. If you actually want to redeem that future value, you are locking
yourself in to a path, which is a major cost you are paying, giving up flexibility in your life. And in careers there are so many factors outside
your control; perhaps your specialty will become less prominent in a few years.
Lots of people have done things like getting a JD only to find the law job market has dried up by the time they graduate.
Saving money in general is questionable now. The governments of the world have demonstrated that they don't care about the integrity of the
world financial systems, so socking money away for the future has immense risk associated with it. (I don't put much credence in the complete
currency collapse alarmists, but I do believe that a long period of negative inflation-adjusted returns is very likely).
In the old days we glorified the good salaryman, who worked hard and saved some money, putting the joy of today
aside to build a life for themselves and their family tomorrow.
Of course we can relate this all to poker, in old skool cbloom-rants style.
One of the first big realizations I had on my own as I was getting better and moving beyond book TAG play is that implied odds are massively
overvalued by most players. "implied odds" is the term used for the imagined future value that you will get if you hit a big hand. Like if
I call with a flush draw, it might be a bad value based on the immediate odds, but if I hit I'll make some more money, which makes it worth it the call. The
problem is that there are a wide variety of reasons why you might not get paid off even if your flush comes (scare cards, or your opponent never
had a strong calling hand to begin with). Or your flush might come and he
might have a better flush (negative implied odds). If you realistically weight all those undesirable outcomes, the result is that the true
effect of implied odds is very small. eg. on the turn you have a 16% chance to improve, you can call a bet for zero EV if the bet
is about 20% of pot size. The action of implied odds is very small; you can only call a bet that's maybe 25% of pot size; really not much more.
Certainly not the 30-35% that people talk themselves into believing is correct. (and of course in no limit holdem you have to adjust for position;
out of position you should consider your implied odds to be zero, chasing a draw out of position is so very bad).
What I'm getting at is the imagined future value of your current investment is far lower than you imagine.
(sort of not related but "implied odds" is also a good example of the "rationalization trap". Whenever a complicated logical exercise
justifies behavior that your naughty irresponsible side secretly wants to do (like chasing draws), you should be very skeptical of that
logic. Whenever you read that "a little red wine is healthy" you should be very skeptical. Whenever the result of a "study" is exactly
what people want to hear, beware).
This isn't really related to the "future value" mistake, but I've been mulling another spending fallacy, which is the "value of an hour"
fallacy.
Sometimes I'll do something like buy a tool or hire a helper because it only costs $50 and saves me an hour of work; my hour is worth
more than $50, so that's a good deal, right? I'm not so sure. I feel like that line of reasoning is just a way of rationalizing more
spending, but I haven't quite found the flaw in it yet.
"02-18-13 - The Myth of Future Value"
13 Comments -
Summary: A bird in the hand is worth two in the bush.
February 18, 2013 at 7:15 PM
"Sometimes I'll do something like buy a tool or hire a helper because it only costs $50 and saves me an hour of work; my hour is worth more than $50, so that's a good deal, right? I'm not so sure. I feel like that line of reasoning is just a way of rationalizing more spending, but I haven't quite found the flaw in it yet. "
The flaw is that your hour is not really worth $50. It's only worth $50 if you could realistically do something else at that exact time that would net you another $50.
Perhaps you earn $X a year and have Y waking hours, so you figure every hour of your time is worth X / Y, but that does not logically follow.
Also related is the fact that placing a dollar value like that on your time in this way is an oversimplification and doesn't take into account your happiness, health, and benefits to other people.
February 19, 2013 at 10:25 AM
In general I think these observations are good though!
February 19, 2013 at 10:27 AM
Actually most people don't overvalue the future, they undervalue it. This has been pretty well studied from a lot of different angles:
http://en.wikipedia.org/wiki/Hyperbolic_discounting
The classic experiment here is that a very large fraction of people will choose $50 now instead of $100 in a year.
It also explains why there are so many more people who will be 'starting their diet tomorrow' than there are people currently dieting today, etc.
February 19, 2013 at 12:36 PM
Super friend: this totally depends on the person and the money.
I work 40 hours a week at $X an hour. The last thing I want to do is work more. If you want me to work more, you have to pay me more than $X an hour.
Therefore my free time is worth more than $X an hour.
Exhibit A: me personally, you'd probably have to pay me something like 10X to give up my free time, because I already have a ton of money. But I'm fairly wealthy, so maybe not that representative.
Exhibit B: all the people who make time-and-a-half for overtime--they make more than $X/hour if they have to work in their "free time".
February 21, 2013 at 12:30 PM
nothings: You seem to be confirming my last sentence.
Let's think about your assertions though. You assert that you are a wealthy person. Let's say you earn $100k/year (that may be low, it may be high, doesn't matter, I don't care how much money you have). So you probably get $30/hr after taxes. You are effectively claiming that after you come home from work, your time not working is worth $300/hr to you. Do you really act in a way consistent with this assertion?
If so, I would expect you employ, part-time, a housekeeper, a driver, possibly a secretary and accountant, and possibly other support personnel, any of which can easily be had for far less money than that. Do you?
February 21, 2013 at 1:18 PM
The whole question of "how do I value my free time" is really complex.
For example, I sort of enjoy my work, I chose it because it's not awful. If I didn't care about enjoyment, I could definitely make more. So your baseline "zero enjoyment" value is the maximum amount you could theoretically make per hour.
If you were making $500/hour as a trader and decide you hate that and want to teach school and make $20/hour, what's your time worth? By making that decision you're effectively saying the difference in enjoyment level is worth $480/hour for you. You still might not want to do horrible soul-crushing work for any less than $500/hour.
Actually I think it's one of those issues where the real analysis is so complex that it's effectively impossible, and doing any approximation of it by equating your salary with time value does more harm than good.
February 21, 2013 at 1:18 PM
cbloom: yeah, agreed, it's impossibly complex to analyze your decisions with that simple model; part of what I probably didn't explain that well with my comment about the 'oversimplification'.
February 21, 2013 at 1:24 PM
"If so, I would expect you employ, part-time, a housekeeper, a driver, possibly a secretary and accountant, and possibly other support personnel, any of which can easily be had for far less money than that. Do you?"
This assumes that you absolutely despise cleaning your own house, and rather enjoy having strangers around that you have to manage. It also assumes that during the housekeeper time you can do other things that are highly enjoyable or profitable.
In fact I think I'd rather do it myself, so if I had a job where I didn't have enough time to maintain my own home and was forced to hire help, that would be a negative about the job and I'd have to make more to compensate.
February 21, 2013 at 1:28 PM
I would expect you employ, part-time, a housekeeper, a driver, possibly a secretary and accountant, and possibly other support personnel, any of which can easily be had for far less money than that. Do you?
I agree with Charles about strangers, in fact I hate dealing with strangers! So I don't do any of things. But I also spend nearly no time on them.
But, ok, I also agree that cost of free time is complicated. You can measure both how much people would have to pay you to give up more free time, and how much you would have to pay to gain more free time.
Unsurprisingly based on all sorts of varying human psychology things, those two numbers can be different even though logically really shouldn't be.
But in my case I can easily balance the high cost of hating dealing with strangers with the low number of hours I'm not spending money to save. I spend perhaps 1 hour a week on housecleaning tasks. I spend a couple hours a year on taxes, which is the only accounting I do. A driver would not save me a significant amount of time as I have a two minute walking commute from home to work, and for the only driving I do regularly, I have someone else in the car I talk to which means it's not time "wasted on driving".
February 21, 2013 at 6:39 PM
"socking money away for the future has immense risk associated with it"
Can you explain this more? My understanding from the context is that there is 'immense risk' in saving money because inflation may eat away at the value of that money in the future. So what is the alternative? Invest only in stocks? Bonds? Real Estate? All of those have 'immense risk', as well. Perhaps your statement is nothing more than a tautology, every decision with regards to the future has 'immense risk' if framed in this manner. Or maybe I'm misunderstanding your point. From my perspective, paying off debts as quickly as possible and putting savings away in a high yield money market account is probably the least risky thing one can do with their money.
February 24, 2013 at 3:41 PM
@Paul -
No, my point is about a more
fundamental macroscopic thing.
The goal of money is to spend it (or use it without spending) to increase your total life happiness.
If you can spend $1 today and get a good total happiness return, and without high chance of negative future effects - the least risky thing is to spend it immediately.
Holding money always has risk that you won't actually get to spend it for happiness later, either because you die, or your income increases greatly, or you move to a commune, or the world financial system collapses, or who knows what.
My particular point there was that I believe there is a huge amount of uncertainty in the future of the world in general in the next 20 years. I think there are a variety of ways that after-inflation returns could be quite bad for a long time (eg. another recession or depression). In some of those bad possibilities it will be an advantage to have savings, sometimes not.
February 24, 2013 at 4:20 PM
Interesting post:
"Sometimes I'll do something like buy a tool or hire a helper because it only costs $50 and saves me an hour of work; my hour is worth more than $50"
The tool and helper both have a hidden time cost. The tool requires unpackaging, setup time, and thought or experience to output good quality results. Similarly the helper requires that you communicate your needs and verify the helpers results.
Here are some additional possible negatives for the tool:
1) It will become obsolete over time. The rate of obsolescence depends upon the design of the tool.
2) It will wear over time. In fact it might break immediately; here you will lose time returning the tool.
3) It will take up space.
4) It could be dangerous to you, or someone else.
5) It might look like the right tool, but when you open it at home it is missing some component that you need.
Here are some additional possible negatives for the helper:
1) Often an hour of the helpers time costs you time. Example: If they work for an hour, communicating your expectations and seeing them met may cost you 20 minutes.
2) Trust part 1: Their work may be sub par, in which case you are required to spend more or correct it yourself. They may be less motivated, less skilled, etc. Ego affects this fear; most naturally assume they will do a better job than others, so the expected future quality of work is different.
3) Trust part 2: They may steal from you.
4) Trust part 3: Harmful behavior: They may learn something private, or even assume an offensive opinion - which then gets shared with those who know you. Less often they may physically assault someone in the home.
5) Trust part 4: They may be late, or not show up at all.
Note 1: In some cases hiring someone or buying a tool makes perfect sense. It's also possible for the helper to be more specialized and more skilled. And the right tool for the job will make an otherwise monotonous task go quickly. For example, before Myspace and Facebook people frequently created personal websites for themselves. Today most will give up a little privacy in exchange for a simple social media platform.
Note 2: Expense should be considered based upon your personal supply of cash vs the cost of the job. Your hourly rate shouldn't factor in unless you would actually work during that hour.
September 21, 2014 at 2:46 PM