Properly valuing ones time is hard

When I was at uni (late 01990s) I read this analysis showing that if you took Bill Gates' annual income, divided it by the number of seconds in a year, and assumed that it would take the average person 4 seconds to bend over to pick up money laying on the ground that it wouldn't be worth Bill's time to pick up 1000 USD.In other words, for Bill to just take the free money he would have to act against his own self-interest (presuming that the 4 seconds in question were subtracted from otherwise productive activity and that he wasn't just out for beers with some mates.)

This economic parable stuck with me and I recounted it any number of times of the ensuing years. Although the math was clear I always felt that somehow the conclusions were wrong. Valuing ones time is all about the opportunity cost of choices, right? If I say yes to one thing I de facto say no to a bunch of other things. One approach to valuing ones time is to base it on earning potential over time. This approach has the key advantage of being quantitative but it doesn't take into account essential human needs (sleep, family, friends, having a life with meaning and not just being a money-making robot, etc.) While economists have tried to frame such human concerns in purely quantitative terms they fail to convince (me, at least.)

The other night I was walking home along Chaussée de Wavre after Startup Weekend Brussels and happened to see some coin on the ground. It was small - 10 or 20 euro cents - but out of habit I bent to pick it up and as I did so I recalled this Bill Gates thing and began to reflect on it. I thought, I don't really need this coin. The amount is too small to make or break me. But then I thought of another episode from my life.

To grok this you need a touch of background. When I graduated from uni I was working as a baker for a fancy restaurant. It was a great gig! All I had to do was keep an eye on the reservation books, and make sure that there was adequate stock of various desserts and breads. I worked by myself, could make my own hours, and in fact spent most of my time on the clock listening to public radio and reading O'Reilly books while my bread rose. At a certain point I realized that I needed to get a real job.

Soon thereafter, in place of my part-time 7 USD / hour baking gig I was pulling in 50k / year. That's a full-time 25 USD. My working hour was suddenly worth about 3.5x what it was a few months previous. At first I didn't deal with the extra money all that well. Although my base expenses were low I almost always found myself broke by the time my next paycheck came. I was earning more than my friends and enjoyed treating them at every opportunity I got.

Now here's the anecdote: They Might Be Giants were playing a concert in downtown Atlanta. I lived north of the city. Knowing that I'd be drinking, I did the <ahem> sensible thing: drove my car to the nearest metro station, parked it, and took the train downtown. The concert was great. Also, I drank what was in my wallet, knowing that by midnight my paycheck would go through. Just after midnight, I scampered off to the bankomat only to find that company payroll had somehow screwed up and I had a zero balance. One second earlier I was flush with dough and the next I realized that I didn't even have change to pay my metro fare home. Having no alternative, I began telling people my story and trying to scrounge up change on the street. I looked respectable enough but people just didn't believe my story. It was a humiliating lesson for me, for one thing about not building in margin for the unexpected and for another what it must feel like to be poor. The amount of change I needed wouldn't have even bought me a glass of water but that evening it was hugely stressful.

So I thought about this story walking down Chaussée de Wavre and realized that the value of that coin I picked up (or the theoretical 1000 USD Bill Gates left on the sidewalk) is really tied together with unknown future outcomes. If we're honest with ourselves, whenever we talk about opportunity cost we're playing a forecasting game. Past performance, as they like to say in investment prospectuses, is not indicative of future results.

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