Thursday, January 26, 2012

The Money Value of Time, Or, Why Almost Everyone Undervalues Their Own Time

Image source.


This post from the Mint blog got me thinking about how almost everyone undervalues their time. I've posted several articles that reference peculiar behaviors that people engage in because they undervalue their time, but I've never posted an article on the phenomenon itself, so I figured now's as good a time as any to rectify that oversight.

The post discusses a dad's tale of volunteering for a book fair at his daughter's school:
My daughter’s school holds an annual book fair to raise money to buy library books and I volunteered to coordinate it this year. A local bookstore brings over crates of books and kids come in throughout the week to buy them. Proceeds are split between the bookstore and the library.
...
In short, the book fair is a big, fun lesson in literacy, generosity, fractions and decimals, all bound up. What could be so bad about that?
Here’s the problem: I ended up taking almost the whole week off work, unpaid, to sit in the library selling books. I’m not complaining about that, though. Who wouldn’t prefer to hang out with kids, reading books, instead of working?
Conservatively, however, I missed out on billing $600 worth of work; call it $450 after taxes. The book fair raised about $150 for the library. If I’d gone to work and just donated my paycheck, the library could have bought a lot more new books.
Even though I thought I knew better, I became the walking incarnation of the conclusion of a famous economics paper:
“The inherent ambiguity of the value of time promotes accommodation and rationalization and may explain the rather obvious observation that most people are a lot more willing to waste time than money.”
Granted, maybe he got such enjoyment out of his volunteer work that it made more sense for him to do the volunteer work than to donate an entire week's pay to the school library - but I doubt it. People enjoy giving away money to worthy causes, as well as volunteering, and giving away three times as much money as he "earned" by volunteering would have probably given him greater satisfaction.

This is just a small example of people being very willing to waste their time, apparently without worrying about the fact that their time is a finite resource, just like their money. Here are some other examples of people (irrationally) wasting time that have appeared on this blog:
  1. People drive around, wasting both time and money (in the form of gasoline), in order to save a few cents per gallon at the gasoline pump - a truly silly, wasteful endeavor. Unless gas in your area are EXTREMELY variable (and I can almost guarantee that they're not), it's almost always in your best interest to fill up at the gas station that takes you the least time and distance out of your way.
  2. People waste astounding amounts of time (and, again, money in the form of gasoline) commuting - $28,760 for a family in the DC area, I estimated a while back. People tolerate (long) commutes because they think they want a stand-alone house with a yard, because houses in the suburbs are cheaper than houses downtown (though this conclusion usually doesn't take into account the costs of commuting, especially the time lost), or for some other reason. As someone who lives in downtown, that's good for me - the fact that people don't value their time properly essentially means that they are subsidizing my downtown lifestyle by making housing in downtown cheaper than it should be. Thanks, everybody!
  3. The very existence of this blog might be an example of me undervaluing my own time. By now, I have spent hundreds of hours researching and writing the almost 300 posts on this blog, and God knows I don't make any money from it - in fact, this blog actually costs me money. But, I'd argue that this blog isn't a byproduct of me undervaluing my time like the above examples - I write it primarily for my own amusement and generally enjoy the process, and I greatly enjoy my readership and the feedback I receive on my posts. On the other hand, if I could get tons of outside consulting gigs that would fill my spare time and that wouldn't get me fired from my regular job (not an inconsiderable feat, unfortunately), I'd probably blog a little less and work a little more - so perhaps I am still undervaluing my time a bit.
Why is it so common for humans to undervalue our time?

I'm not a philosopher (if you are, feel free to give your own explanation in the comments), but one possible series of explanations could be born from our collective desire to deny the inevitability of our own death. We waste our time as a kind of collective denial mechanism, brandishing our wasted time as a shield or badge that shows God, the universe, nature, etc. that we're special and that we're not going to die. I'll leave this line of explanation to others who are better equipped than I to elaborate on it.

Another possibility is that we are simply deeply irrational beings who fear losses more than we value gains (for more information, look up prospect theory). That is, losing $100 makes us twice as unhappy as gaining $100 makes us happy. Time is an extremely intangible resource, so it's hard for most people to understand properly; and if you don't understand something properly, you can't value it properly. Therefore, people are far less afraid of wasting (i.e. losing) time than they are losing something tangible, like money, even though their time might be more valuable.

I'm inclined to put more stock into the second explanation than the first (though you're welcome to posit more explanations in the comments). Part of the reason for this is that several notable economists (highly rational people) place very high values on their time - from $400 per hour up to $5000 per hour. Those are the rates they've decided to charge if a random stranger from the Interwebz wants to talk to them. They assume that talking to a random stranger will probably not be the most pleasant of tasks, so that's the price these rational people put on talking to a random stranger for an hour versus, for example, having an extra hour of playtime with their children, reading a book they want to read, watching a TV show they want to watch, playing a video game they want to play, writing blog posts, etc. Some people would look at some of those alternative activities and conclude that they are themselves wastes of time - but the point is that it's generally a good idea to have some idea of the marginal value of your own time and use that value to help guide decisions about what you do.

I rather suspect that if more people thought that way, people would live closer to where they work; gas consumption and air pollution would decrease dramatically; the world would function far more efficiently; and everyone would be happier. And the first step is for you to stop undervaluing your own time!

(A useful corollary to this is to think about what you buy in terms of the hours of work you had to put in to buy something - for example, if people started thinking in terms of coffee and lunch bought at the office as costing them ~5.5 hours per week rather than $70 per week, they'd probably pack their lunch and coffee more often. [Note: hour-to-cash conversion done with the U.S. median hourly wage, accounting for taxes and the like.])

3 comments:

  1. Why is it irrational to fear losses more than I value gains? Suppose my rent bill is $500, and I have $510 in my pocket. Losing $20 will make my life very bad. Gaining $20 would be nice, but the increase in my well-being is not on the same order of magnitude.

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  2. Another useful calculation is gas per mile in cents... at 15 mpg, a 30-mile round trip (from the suburb to the city, for instance) costs 2 gallons, which is about 7 bucks.

    When I was younger I did the math on gas hunting, since the news would put on a station with super low prices somewhere in OKC (area: 645 sq mi). I did a calculation by which when you're gas hunting, anything over a mile out of your way generally means you're spending more than you save. The less mpg your car gets, the smaller that radius is.

    I didn't even count time, though.

    --andrew

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  3. Joe:

    Ah, but the rub is that your money and finances don't actually work that way - if you only had $500 to your name, you'd probably be rather poor and have a much different outlook on risk and happiness.

    To get at my point, look at it this way (taken from this paper - http://www.powdthavee.co.uk/resources/Behavioural_Economics_and_Public_Policy.pdf):

    'Randomly selected individuals in the control group were asked the following question:

    "Imagine that your country is preparing for an outbreak of a disease which is expected to kill 600 people. Given the choice between two vaccination schedules, Program A which will save 200 and Program B which will save all 600 with probability 1/3 - which program would you choose?"

    On the other hand, people in the treated group were asked the following question: "Imagine that your country is preparing for an outbreak of a disease which is expected to kill 600 people. Given the choice between two vaccination schedules, Program C which will allow 400 people to die and Program D which will let no one die with probability 1/3 and all 600 will die with probability 2/3 - which program would you choose?"

    According to standard economic theory, because the outcomes of two sets of choices (A and C or B and D) are the same, the split between randomly selected individuals choosing either A or B and C or D should be roughly the same. However, as it turns out, more people in the control group chose option A than option B. Conversely, more people in the treatment group chose option D than option C. This is simply because, in our brain, the first question which had been asked on the control group generates a 'gain' frame for us (i.e. we are framed to think of things in terms of what we could gain), whereas the second question was phrased so that people in the treatment group were framed to think of things in terms of what they could lose.'

    Joe, my point is simply that, on the margin, this is irrational behavior that leads to sub-optimal decision-making and economic inefficiencies. Of course, people can rationalize this behavior - that's why we all engage in it so often. Nevertheless, it leads to poorer outcomes for all of us, both personally and collectively.

    Andrew: Thanks for the additional calculation - and for the sideways confirmation that we (unconsciously) are willing to waste our time constantly, as you left time out of your original calculation ;)

    -The Angry Bureaucrat

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