Human beings make many obvious mistakes within their lifetime. Whether it’s marrying the wrong person, or buying airline stock (somebody has to), many of these mistakes are easily preventable, and other people can tell you about them, though we sometimes chose to ignore these people. One mistake that’s often forget about, and that others don’t notice easily, is mis-valuing your time.
There are various ways to attach a value to your time, the first would be to check how much you would earn if you worked in that time. Let’s say you’re paid a wage of $25/hour. If you’re paid a salary, you can find your wage by dividing your salary by number of hours worked. Anyway, you need to see how much you earn per minute, about 42 cents, and how much you earn per second, about 0.7 cents. This is extremely important while making decisions. For example: you drop a penny on the ground, it takes 2 seconds to pick it up. Most people would pick it up regardless of their income, because it’s intuitively right, and therefore backed by instinct. Unfortunately, the value of 2 seconds of your time would be 0.7¢*2, or 1.4¢. Therefore, it’s inefficient to pick up the penny, you lose 0.4¢. That might not sound like a lot, but that can be extrapolated into many other situations.
The above situation is one where people tend to undervalue their time. It probably takes about 5 seconds to pick up the penny, it will be a 5 second delay, due to slowing down, looking for the penny, etc., therefore, you pick up 720 pennies per hour, or value your time at $7.20/hour, less than minimum wage in most countries. There are also situations where people over value their time. A good example would be in New York, where people might take a cab between 2 subway stations, if the next subway train is 8 minutes away. Let’s say that the cab fare is $10, with tip, an underestimate to illustrate my point. Therefore, you value your time at $10/8 minutes, or $75/hour, quite a reasonable wage, and one of someone who gets an MBA from a top university.
This would be a situation where they overvalue their time.
The question which is unanswered by wage, is: how would you value the time of someone who isn’t paid a wage, such as a billionaire’s son, who feels no need to work after inheriting a billion dollar fortune. One method of valuation is to assume that his salary is the interest that he receives on the fortune, at a 5% interest rate, that would be $50 million. Assuming that one works on average 2000 hours a year, this would mean that their wage is $25,000/hour, and that’s how they can value their time. However, doing something else won’t prevent them from earning that $25000/hour, such as picking up a penny, so that method of valuation is flawed.
Although the wage method is a good quick method, especially for those without a large amount of wealth, otherwise (a billionaire who earns $5/hour shouldn’t value his time at $5/hour), if one’s wealth is large relative to salary, we need a better method of valuation. There are other problems with the wage method, for example, it allows for one to commit vices, as they would get paid more per hour, than working, but it doesn’t account for the moral dilemma. I think the way to look at this is that work itself has a negative value, and your wage must be larger than the negative value of working. For example, if you feel that working as a software engineer, makes you unhappy enough to lose $20/hour, your wage must be greater than $20/hour for you to do that job. In your time, you must do what gives you the greatest gain in value per unit time.
Now you may ask, why is wealth important to this process, isn’t it the same process for everyone? Well the truth is that the downside to working is mainly an emotional toll, not a financial one. You feel down after working for 8 hours, although it costs you no money. Therefore, wage is not only a value of productivity, but a value of emotions. Rich people value their emotions more, in monetary terms because they have more money. That’s why they go to $200/hour counseling, which most members of the lower and middle classes can’t afford. They’re also likely to buy $50,000 bottles of wine, because it gives them a very marginally higher emotional satisfaction, which is worth $50,000 to them. It also gives them status, which pleases them emotionally, and adds to the value of the wine bottle. If consuming their first bottle of win gives them $60,000 of satisfaction, and they consume it in 1 hour, then the value gained is $60000-$50000/1 hour, or $10000/hour, more than anything else. This is why rich people buy more expensive things, it’s not just because they’re rich. Of course they won’t continue buying the wine, because of the law of diminishing marginal utility, each subsequent bottle is worth less to them. Also, their status isn’t increased significantly by having 2 bottles of expensive wine, instead of one, and the wine is meant to be a once in a lifetime tasting.
There’s a paradox which rises here. Let’s assume that there’s an academic, who’s retired at the age of 25, with savings of $100,000. Since he’s an intellectual, he appreciates all things intellectual. If he values a $100,000 bottle of wine at $200,000, he should buy it, because that gives him his maximum hourly gain, $100,000/hour. However, this obviously isn’t the best solution, as he’s broke after this. Does this mean that we need a no formula?
No, it doesn’t, because as discussed earlier, the bottle of wine gives one an emotional gain. It’s nearly impossible for someone to have an emotional gain greater than his wealth, as emotional gain is proportional to wealth. Is the bottle of wine worth 1000 hours of counseling, or 2000 dinners at a nice restaurant. I don’t think so. the hypothetical scenario is far too unlikely to affect the model.
In the billionaire who earns $5/hour question, the billionaire shouldn’t do that job, as it definitely doesn’t give him the maximum gain in value. So, the billionaire has already mis-valued his time.
In conclusion, the simple way to value one’s time, for those who are paid a wage, is to see how much they time they lose by performing a certain action, and how much money, or value gain they lose. A more accurate, but harder to implement system, is to see what gives you maximum value gain per unit time, and do that in your time. It’s possible that that will be work, if you’re paid $1000/hour, for a job which costs you $20/hour in emotional terms. Also, with work, there’s an increasing emotional stress with hours worked. Even if you were paid a million dollars an hour, you wouldn’t work for 300 hours straight. Also, as wealth increases, emotional stress increases, in monetary value. So, we can conclude that people should only do what gives them the maximum gain in value.
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