The Value of Time | Hacker News Reader

The Value of Time

jackg.org

117 pointsbigjoecumbo54 comments

While most of the comments here are talking about the fact that this is the posters "discovery" of opportunity cost, there's another point to be made here. There are several reasons why, as a startup founder, getting that $660 laptop instead of the $700 one benefits your company other than the $40 that stays in your bank account.

Frugality breeds more frugality: if you set an example, others will follow and compound the financial savings. Frugality can result in camaraderie, since you are all in the rickety boat together eating ramen. Frugality can prevent resentment and walls going up between employees and decision makers, since even the CEO has to cut back on everyday luxuries and lives the same way employees do. Frugality can express your values by giving you an opportunity to "splurge": if you spring for a $500 chair for all the engineers but never fly first class yourself, it shows that you understand how important a good working environment is compared to other things that are perceived to be frivolous. Frugality can serve as a reminder of risk: if you're surrounded by luxuries you can forget you are actually a startup fighting to stay alive. Frugality can maintain a good relationship with investors even when the going gets tough, since it shows you're trying your best to avoid blowing their investment. Frugality can motivate employees and reward them for success, since you'll only add perks when the company can afford them, and when you do, the team made it happen not the VCs. The list goes on.

I think this gets into a debate that can't really be settled with rights and wrongs, but:

Frugality for frugality's sake is just as dangerous as extravagance for extravagance's sake. Saving $40 on a laptop is great if and only if you're positive that a more expensive laptop isn't going to make that money back. The danger of excessive frugality is that you start thinking of employees as costs to be trimmed, as opposed to investments who generally pay handsome dividends.

Never underestimate the productivity of an engineer who has everything he needs.

Slightly off-topic: I had ramen a few times in Japan, and while truly delicious, it's massively expensive and rather exotic. Why is ramen a synonym for "cheap" in the US (apparently)? Or does it mean just "instant noodles" over there?

There are ramen restaurants in cities with larger Asian populations like NYC and Los Angeles. To most Americans, however, ramen refers to the $0.50/meal packs of instant noodles.

The US of A has a greater capacity to produce grains needed to produce the noodles, and can deliver them to market without having to put them on a boat. Japan has less arable land, so less grain producing land, and (probably) has to import more (which requires boats).

> The US of A has a greater capacity to produce grains needed to produce the noodles

And more importantly, a greater capacity to subsdize production of said grains.

Edit: Did this comment really get greyed out? The mechanism for that is still kind of mysterious to me. Let me clarify, I don't mean the US has more money, just a dumber system of farm subsidies.

American Ramen 22 cents a meal: http://www.amazon.com/Maruchan-Ramen-Chili-3-Ounce-Packages/...

Ramen in the US refers to instant dried noodles that come with a packet of bouillon, not with the labour-intensive-but-awesome real article.

That could hurt your company if they follow your example and don't make that value calculation, and chase $40 savings instead of spending their time more wisely.

(I also was under the impression that there wasn't any difference in the quality of the hypothetical $700/$660 laptops, that the difference in price merely comes from trying to exploit inefficiencies in the market.)

This is the concept of opportunity cost[1], and along with time preference and marginal utility, it is one of the foundations of praxeological thought. Understanding OC changes your entire perspective on the world, makes you realize why rich people don’t recycle as much, why first class flights exist, and why people with higher salaries are more likely to have chauffeurs (so they can not waste time on the act of driving, when the economic output they would produce in that time pays for the driver, the car, the fuel, and still leaves profit).

[1]: http://en.wikipedia.org/wiki/Opportunity_cost

Opportunity cost is an important idea to keep in mind.

However, there are some other factors which are also important. For one, money now is worth more than money later. It's easiest to imagine future earnings discounted based on how far in the future they are; I think traditionally they are discounted exponentially.

Another is that time worked is not necessarily linearly proportional to productivity. Perhaps for the most menial of assembly line work this is true, but for creative endeavors like programming it isn't. In fact, working more can make you less productive in an absolute sense!

You also have to keep your risk tolerance in mind. That is, a 1% chance of earning $1000 is not the same as a 10% chance of earning $100.

And, of course, opportunity cost also applies to all sorts of resources like money (especially in some liquid form) as well as time. This is something to keep in mind if you plan on investing money in something illiquid.

In short: opportunity cost is important, but so are a bunch of other things.

This can actually be captured with the simple recognition that opportunity cost is not entirely monetary, but rather it's about value. "Money now" has more value than "money later". This is described using a http://en.wikipedia.org/wiki/Value_function

> It's easiest to imagine future earnings discounted based on how far in the future they are; I think traditionally they are discounted exponentially.

It's called http://en.wikipedia.org/wiki/Temporal_discounting

> It's called http://en.wikipedia.org/wiki/Temporal_discounting

For larger amounts of money, it is also important to consider the time value of money: http://en.wikipedia.org/wiki/Time_value_of_money

The first point you raised is 'time preference', which is simply the discounting we apply to future or uncertain income over immediate value.

The second one is 'marginal utility', which is perhaps best described as the difference in value of a litre of water to a dehydrated man in a desert vs. a man who owns a desalination plant.

> when the economic output they would produce in that time pays for the driver, the car, the fuel, and still leaves profit

Is that really true? From a certain point the economic output is produced regardless of what that guy is doing, he is just setting future directions. Does Tim Cook generate $2.9 million every time he takes a dump? I don't think so.

I have a better explanation: convenience and satisfaction.

There's still productive things you can do while being driven somewhere - phone calls, reading documents, etc.

It's very easy to use a framework like this trick yourself into spending more money on luxuries, though, because productivity fluctuates wildly and isn't really easy to account for on an hour-by-hour basis. Will you really be providing that extra $50 in value if you take the cab instead of the subway? Often, I think the honest answer is "no". People often do think "my time is too valuable to take the subway", but I suspect that may boil down to status more than actual value in many cases (something closer to "I'm too important to take the subway").

It all gets quite fuzzy, at least if you're working on a salaried basis rather than billing hours. My own experiences are that the opportunity-cost ROI often doesn't materialize, because spending the extra $X to save Y minutes of time does not really result in me getting more done that day, since productivity bottlenecks tend to be things other than the number of minutes in the day. Plus, you can get a lot of thinking and planning done on the subway. :)

Now the fun part is that your time has different value to different people.

For instance for yourself, your time may be worth what you are being paid. Suppose that you get $120k/year. You work 8 hours per day, 5 days per week, 50 weeks per year, so you're being paid $60/hour. So if money for something comes out of you, $60/hour is a cap on what you're willing to pay - and actually it is less than that because you have little direct ability to change how much you're being paid.

Now let's look at that same employee from the point of view of the employer. If you've got an employee, after benefits, office space, training, etc, on average you're paying 2x salary for that person. (This figure varies by organization, but 2x is a typical figure.) That person works for you 50 weeks per year, 5 days/week, 6 hours per day. (Why 6 hours? Well they are present for 8, but take lunch, do personal emails, etc. So they only really work for perhaps 6 of those hours.) Do the math - that employee is costing $160/hour.

$60 vs $160 for the same person is pretty bad, but it does not end here. In order for it to make sense to hire an employee, you want that employee to be earning you more than they cost. So $160/hour is a floor for the value you hope they are providing - hopefully that figure is more like $200/hour or more.

The moral is that an employee's time is worth massively more for an employer than an employee. And therefore a wise employer should be willing to pay several times more than the employee to make improvements in how efficiently that time gets used.

(That said, there is a breed of employee who, faced with an employer who is willing to be generous, will try to figure out how much they can ask for. There is a balance to be found...)

I find it frustrating that many tech people (sorry for being general, but I see it a lot on this site and other communities) have a general sense of disdain for MBA/BBA-educated individuals, and then write multi-paragraph blog posts about opportunity cost, which is a 101 concept in any economics or business curriculum.

I'm not trying to derisive of Jack -- it's a good post -- but this is not some grand insight. This is why educational and personal diversity is a good thing: reinventing the wheel doesn't just apply to code, it applies to business.

I've never heard of people having disdain for the particular knowledge or economic "science" (to use that term loosely) of MBAs. The problem people have with such folk is the way it is applied (too often blindly).

You told the truth, but the with the wrong attitude, sir.

> I find it frustrating that many tech people (sorry for being general, but I see it a lot on this site and other communities) have a general sense of disdain for MBA/BBA-educated individuals

Speaking as an MBA, the problem isn't so much the education itself as it is the types of individuals MBA programs attract.

Many of those people are just looking for ways to bump up their base salary. Many don't "take away" any real knowledge, because the program is just a means to an end. In my MBA program, there were plenty of greedy and fake people, and it's no surprise to me that people with MBAs garner so much disdain.

This is an excellent thought process, and it's good to know about opportunity cost.

Once you do, internalize it, and pack it away so it can never see the light.

As soon as you start treating people as the equivalent of the monetary value of their time, you're lost. You've gone too far.

This way of thinking is powerful and dark. Please—use in moderation.

Indeed. I know a company that made the mistake of putting an MBA type in charge of advertising, and therefore in charge of their affiliate program. She pushed always trying to figure out how much an affiliate was worth, before deciding if their stupid questions were worth the time that it took to answer them.

She made two fundamental mistakes. The first is that the time it takes to figure out up front whether someone is worth her time leads to a bad interaction surprisingly often (so even the "worthwhile" ones get a worse experience than otherwise). The second is that she valued an affiliate at the profit on the business they brought in minus the amount they got paid, completely missing the fact that having them out there linking to you improves SEO, which helps bring additional free traffic.

The result of her being penny-wise and pound-foolish, and that company's rapid growth trajectory turned flat and stagnated.

FYI,if you're being penny wise and pound foolish then you're not doing a very good job of calculating opportunity cost.

And it also sounds like the "MBA type" wasn't doing a very good job of calculating value added, which is a separate problem from opportunity cost.

That would be my main point.

There are a lot of hidden sources of value which are hard to quantify when it comes to anything like customer service. Therefore the errors that she was making are likely to be systemic in anyone who is trying to be economically efficient.

And even more likely to be systemic in anyone who is not trying to measure the world. Science works.

Actually not. People who do not try to measure what is going on make an entirely different set of systemic errors.

Which set of errors matters more depends on what you're doing. For anything resembling quality customer service, measuring tends to lead to the worse errors. But a CFO who does not reflexively try to measure stuff would be a disaster.

The "MBA type" is probably an idiot, or an idiot with an MBA. But it's not the MBA itself that makes a person an idiot.

An MBA teaches you a lot of important facts about business and how to run it. There's nothing inherently wrong about an MBA.

I believe there is, however, a striking tendency in those who seek it to be searching for the wrong path to success.

Don't know if anything has changed in the 20 years since I got my MBA, but "An MBA teaches you a lot of important facts about business and how to run it." is maybe only 60% true.

You learn a lot of theories and do a lot of case studies, but the "how" part is definitely lacking.

You are right about the types of people who enter MBA programs. I couldn't stand most of my peers. A lot of them were all about greed and status.

At institutional scales, this sort of thinking can add up to things of real significance. For example: I'm a transport planner specialising in Personal Rapid Transit (PRT) systems[1]. 5 years ago, a certain large corporation took a very serious interest in building a campus-wide PRT system, funding extensive feasibility and engineering studies to that effect. The primary rationale for the system was value of time. When these high-value employees spend a significant amount of time hunting for places to park or moving around the campus on its internal shuttlebus system, that represents a substantial loss of value-creation. Thus a $360 million PRT system which saved each employee an average of five minutes per day would pay for itself in just a few years. The business case had other legs to stand on as well, but that was by far the most impressive item on the balance sheet.

Unfortunately, before the scheme could come to fruition, there followed a series of unfortunate events -- including but by no means limited to the collapse of the world economy -- which convinced said corporation that an even more appealing way to optimise their employees' value creation was to cancel all capital expenditures and sack a few thousand people. And the rest is history.

1: http://en.wikipedia.org/wiki/Personal_rapid_transit

Jason Cohen, founder of WP Engine, talked a bit about this when he interviewed[1] for Mixergy:

Yeah. I’m a big fan of, I think Don Mershaw[SP] was the first person that told me this, but he said a founder needs to value his time at $1000/hour ...

Which he justifies:

So, what if you had a consulting customer that said, “I’ll pay you $200/hour but there’s only a one fifths chance that I’ll actually pay you.” Now, what hourly rate would you quote? Now you’d quote more like $1000/hour, because you probably won’t get paid, but if you do you need to be paid disproportionately high to account for the fact that you took on the risk. That’s exactly what’s happening in a start up, and that’s exactly why it needs to be $1000/hour.

[1] http://mixergy.com/jason-cohen-wpengine-interview-2/

But that doesn't make sense - in the consulting example you would still value your time at $200/hour, you'd just be at a $1000/hour wage.

That fits with startups, where you value your time at x, and are looking for at 5x exit when then thing sells. You're still valuing your time at x.

I think that OP raises a good point in this post, but I'm skeptical of whether his strategy is really applicable in the real world. Yes, there are obviously some cases where it may make sense to do the more expensive option in order to save time, but can this strategy really be used as an overarching decision making mechanism? I think not, primarily because of the fluctuations in productivity/necessity of productivity that happen from minute to minute, hour to hour.

As OP says, he "use[s the] expected values throughout this post,"—I don't think average/expected value is really an accurate way to make decisions about non-averaged decisions. Primarily, if you always choose the more expensive thing to save time, justifying because your average value makes it worth it, you will inevitably end up "saving" time that is useless; therefore, you'll end up—on average—spending more money than the value you create.

Does anyone else feel this way/think I'm crazy for thinking this?

Let's take the salesman example. A salesman isn't literally making $150/hour. As a hypothetical the value might be $0 in hour 0, $450 in hour 1 and $0 in hour 2 for an average of $150/hour. Much of sales work is this way, their is preparation time, and sales time. There may be prospecting, etc. So even though they may not make the money during that hour, if you are burning their motivation to prep or prospect you are burning their ability to get through hour 0 and into hour 1.

Part of the reason to use an average is that it gives you a very simple, but generally applicable metric. There are always exceptions and the rate may change frequently or slowly. Those are nitpicks though. The general point is that your time should be valued against the best use of your time. For instance the hotel example only makes sense if the alternative to walking to the convention is working or more time networking to generate revenue. If the alternative is sitting in your hotel room longer watching TV then $160/hour is not the replacement rate.

I found the opposite feedback loop. Namely, the more I spend money to avoid low-value tasks, the more my average value goes up, which in turn lets me spend more money.

Example: I hired a personal assistant to take care of several tasks for me. I could have done them slightly faster myself, but this saved me a lot of time and mental energy, which I used to work on activities that earn me more money, which let me raise my rates, which let me outsource pricier stuff.

This reminds me of the movie In Time[1]. The movie itself isn't particularly amazing, but I definitely resonated with it's underlying themes around the value of both time and money, and how they are inextricably linked.

It's a hard idea to communicate across to your average layperson though, that their half hour of diligently shopping around for the best deal actually cost them more than they saved. It's all conjecture though until you're actually using your time to earn money, or you are being paid for your time. But even if you aren't directly making money from your time, you can argue that the time spent will still offset/reduce the amount of time you do earn money from.

There are definitely limits on this type of thinking, and how seriously you should take it.

[1] http://en.wikipedia.org/wiki/In_Time

I also appreciated the concept of _In Time_, even though the plot was awful. I wouldn't hedge by saying there are limits to this type of thinking. Everyone should take it very seriously. Time is money in a very real sense.

Speaking of which, I should get back to work.

There is more to life than optimizing everything based on cost. That walk from the more distant hotel is healthy for you, and you get to enjoy the scenery. Sometimes it's good to think of time as having monetary value because it gives you perspective, but also sometimes it's good to forget it and actually enjoy life.

Ironically, it can often turn out that the latter is, in fact, more optimal.

Sometimes stochasticity makes better decisions than we possibly can. Do not limit yourself to logic alone—it describes such a very small subset of human possibility.

This. I faced an interesting paradox a few years ago when I first learned about opportunity cost. I found myself explicitly analyzing every trivial decisions in terms of opportunity cost and eventually realized that constantly thinking about opportunity cost was costing me opportunities. In other words, the opportunity cost of caring about opportunity cost is most often not worth it.

Yes! This is most of what I take from the ideas of Zen: that trying too hard at something ruins the final result.

How I describe this to the gaming generation is through a common shared experience. Remember that one time you spent 3 hours trying to beat that one level in that one game, then finally got frustrated and gave up, only to return the next day and beat it on your first try in 3 minutes? Zen.

The paradox makes no sense logically, yet it exists.

Moral: don't get in your own way—stop thinking too much about why and how and just do!

Or one could say instead that there are other costs besides monetary ones. Being less healthy and/or happy is a cost too.

You probably shouldn't spend your day calculating trade-offs for every purchase you make. Theoretical value added is still just theoretical value, but cash outflows come from finite cash.

The best values and leverage are found high repetition or high scale activities. For example, everyone has to commute to work every day. Considering moving the office closer to a train station/highway/bus terminal so that each of your employees shaves off 15min of commute time is a highly leverage-able decision.

No, you shouldn't, but you can still calculate more. For example, do one calculation up front about 'should I in general take the subway or a taxi?' and then follow your answer for the next couple years; for maybe a few minutes of work, you save money-time for perhaps thousands of days to come.

In general, the best space-time tradeoff will never be 'all time' or 'all space'.

I think this is taking the value of time concept way too far. So if an employee spends 15 minutes in the toilet he's pulling down the company's future value? Feeling entitled to favors from others (whose time is 'less valuable') is just a peek into where this line of thought heads.

Anyway, I'm not wasting my time discussing this [$640 blog post].

> So if an employee spends 15 minutes in the toilet he's pulling down the company's future value?

Yes, he is. The way to realise that is to ask what would happen if everyone in the company did that, and did it not for 15 minutes but for 8 hours a day.

Sure, 15 minutes may not make a huge difference - but it's like saying "chucking a penny into the rubbish isn't losing me money", it may not be losing you enough to be worth caring about, but technically yes it is.

This kind of mental framework is very key for analytic decision making. At a decision crossroads, having this sort of thought process has often helped me make the right choices. That being said, if I'm not careful, this kind of non-stop analysis of my productivity makes me pretty stressed out. Yes, I value my time a lot - but I've also had to learn to let go sometimes and let life happen. The more I continue to ruminate on thoughts like, "Am I creating $100 worth of value right now?", the more my ability to relax deteriorates. I don't want to be in constant productivity maximization mode.

There's a meaningful literature about this sort of thing in transport economics: http://en.wikipedia.org/wiki/Value_of_time

A good start down the path - but you have to make the next conceptual leap after thinking about time as a countdown resource. That leap is thinking about whether you can use time to create more time, what sort of trade-offs you can pull in through support of medical research to ensure that you have a higher expectation value of living for a greater number of healthy years.

You can indeed put time and resources in to that goal in this day and age, and a related question is what you losing in the trade-off by not doing any of that. e.g.:

http://www.sens.org

http://www.neworgan.org

http://www.mfoundation.org

http://www.lifestarinstitute.org

http://translate.google.com/translate?u=http://www.scienceag...

http://www.bg-rf.org.uk

etc.

Related XKCD: http://xkcd.com/951/

> Once you start thinking like this, your day becomes full of these tradeoffs. Today I had to buy computer for a new employee [5]. I went to Amazon, my go-to online store, and immediately found what I was looking for listed at $700. Based on previous experience, I know that Amazon isn’t usually the cheapest option for laptops; I estimated that if I spent another fifteen minutes diligently searching the web, the expected value of the best price I’d find would be $660. At that moment I was estimated my rate of value creation at over $160/hr, so I bought the Amazon computer and moved on to the next item on my to-do list.

I wonder if Amazon does this when they price items like computers?

Welcome to the next level. Its one of those things like comparative advantage [1] that you need to internalize so that decisions you make take them into account. It goes along with understanding that 'money' when you give out equity for it, costs 10x what it does if you earn it.

[1] http://en.wikipedia.org/wiki/Comparative_advantage

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