Saturday, March 29, 2014

Tiny Units of Happiness

Time to learn some economics. This will be long and educational, but I promise it will be enlightening, contain a song from Hootie and the Blowfish, and it may even make your life a little better.

First, economics is not the study of money, it is the study of incentives. Economists discovered a long time ago that money is not the ultimate motivator they thought it was. Although the $'s play a large role in our society, economists had to find a way to explain why one person would work a job for X number dollars but another would only do the job for X+10 dollars. Shouldn't X motivate different people the same amount? Obviously money was not the sole incentive at play. Economists decided there must be a more base incentive. What makes people do what they do? Happiness! How do you quantify happiness? Economists created the util. In very simple terms, a util really is a tiny unit of happiness. (Surprise: Utils is what I named my blog so many years ago, intentionally leading up to this point.) Economists could now explain why supposed equal incentive did not equally incentivize different people. One person may be just as happy with $100 as another is with $1000. An economist would say their utility is the same. That's enough money talk for now. From this point on I will be talking about utils.

Second, time is a commodity. Everything costs time. The value of time is based on what you do with it. You can use your time to work, to earn money to buy things, to spend on relationships, hobbies, travelling, etc... Going to a movie costs 3 hours of time. One hour to earn the money and two to actually watch it. Buying a rolex watch may cost 50 hours spent at work. Having a child costs 18 years.

Third, all decisions have a cost. Opportunity costs are the things sacrificed at the expense of something else. Examples would include going on a vacation at the expense of buying a new tv, or having a quiet night at home at the expense of going to a friend's party. Buying a rolex may come at the expense of repairing a car or going away for the weekend. Any time a decision is made there is an opportunity cost.

Utils, time and opportunity costs are intimately interconnected.

Putting it all together

In our daily lives we rarely think about our intentions consciously in terms of utils, time and opportunity costs but underneath the surface those are the 3 factors involved in all our decision making. For example, if you want to eat an extra piece of cake (utils), you will either gain weight (negative utils) or need some extra physical activity (negative utils) to burn off the calories. Is there a better use of your time (opportunity cost) than running on a treadmill? The question then becomes, are the utils derived from eating that cake worth more than the cost (negative utils and opportunity cost) of that extra piece of cake? That was just an example but it perfectly illustrates what I am talking about.

Stories and Math

In high school I had a friend who got a job. He worked a lot to buy a car. He used his car to go to work. He needed to earn money to make his car payments and keep it running and fueled. He needed his car to be fueled and running so he could go to work. It was a pointless cycle. I didn't really work when I was in school. I didn't have a lot of money but I didn't have a lot of expenses. I did have a lot of free time though. And to me, the utility derived from my free time (riding my bike, watching tv and going to youth group) was worth a lot more than driving a sports car and having to work all the time to support it. My friend found more utils in the car than riding a bike and watching tv and was willing to trade his time for the car.

The reason I mention all this now is that I am still quite easily entertained. I don't need a lot in life and yet I seem to be spending a lot of a precious commodity, time, on things that don't have as much value to me, like work (or too much work). Granted, I need to work to feed myself and whatnot, but something seems out of kilter. I work too much and enjoy life too little. I've been thinking about this a lot lately because I feel like I need to make a change.

This weekend I had a couple storm doors installed at my house. My dad would have done the work himself. I did not do the work myself. I hired someone to buy the doors and install them. I never had to shop for doors or do the physical installation myself. Yes, I realize it could have been cheaper if I did all the work. Dad would have saved the money but lost the weekend. I had a weekend mostly free from work. I had some friends over. I watched a movie. I played some video games. I practiced a routine for the youth group talent show.

I gained more utils by spending my time doing those things than by installing the doors and saving money. Was it worth it? To me, yes. To my dad, probably not. Like I said, we're just different people. And that's the whole reason why economists invented utils. The same thing will provide us with different amounts of "happiness". Sometimes the opportunity costs of those things are greater than one of us is willing to sacrifice. Simply put, we make different choices, even when the options are the same, because of the value (utils and time) associated with our options.

I am very mathematical. I try not to reduce all decisions and behaviour to mathematical formulas, but let me share with you something I have been working on for a while. Below is a numerical representation of how we make decisions in life. I like to call it Life Economics.

In terms of material possessions:
A new car = 1000 hours = 1000 utils
A used car = 300 hours = 500 utils
A new bike = 10 hours = 50 utils

If I was looking for the best return on investment a new bike is the best decision I could make. The utils per hour is 5. In other words I gain the most happiness per unit of time invested. A new car would only provide a utils per hour of 1. This means that although I am happier with a new car, I gain the most happiness in the least amount of time with a new bike. Somewhere in between lies a used car. There are two things to note from this example. First, the opportunity cost. For all practical purposes, the used car does everything the new car does. However, it takes less than 1/3 of the time it would take to get a new car. This means I still have 700 hours to spend on other things. Those other things may also provide me with utils. Those other things are the opportunity cost of buying a new car. Second, there is the law of diminishing returns. If one new bike provides me with 50 utils, why don't I buy 20 bikes? It would only cost me 200 hours and provide me with 1000 utils, right? Wrong. I gain less and less utils for every new bike I buy until soon, another new bike would not add any value to my life. I think after 5 bikes my utils would be maxed out at about 100. That means I could aquire 100 new bikes and never be as happy as I could with one used car.

In life we all attempt to maximize our utils, whether we are conscious of it or not. I hope the preceding has helped you to visualize what you are spending your life on, and maybe ask yourself why.

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