

The Value of Time - bigjoecumbo
http://jackg.org/the-value-of-time

======
gfodor
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.

~~~
Radim
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?

~~~
sageikosa
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).

~~~
ArbitraryLimits
> 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.

------
zacharyvoase
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>

~~~
tikhonj
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.

~~~
saraid216
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>

~~~
olalonde
> 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>

------
_delirium
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. :)

------
btilly
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...)

------
jmduke
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.

~~~
dsymonds
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).

------
calinet6
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.

~~~
btilly
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.

~~~
jonbeerhalter
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.

~~~
btilly
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.

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

~~~
btilly
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.

------
nkoren
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>

------
DanielRibeiro
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/>

~~~
klochner
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.

------
jessepollak
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?

~~~
NyxWulf
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.

------
genbattle
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>

~~~
msellout
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.

------
acro
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.

~~~
calinet6
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.

~~~
olalonde
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.

~~~
calinet6
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!

------
coryl
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.

~~~
gwern
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'.

------
ricardobeat
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].

~~~
corin_
> _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.

------
blakesmith
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.

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

------
reasonattlm
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://translate.google.com/translate?u=http://www.scienceagainstaging.org)

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

etc.

------
gregschlom
Related XKCD: <http://xkcd.com/951/>

------
stcredzero
_> 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?

------
ChuckMcM
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>

