Loss aversion is one of the best.
Humans respond more strongly to loss than they enjoy a gain of equal size. That is, we’d prefer to avoid a $10 loss than we would enjoy a gain of $10.
It’s as irrational as the commonly held belief that we shouldn’t finance depreciating assets, but we’ve come to accept it.
What’s Your Time Worth?
Personal finance requires that we understand money as a substitute for time. This was a key part of my article about living without money. Living without money is merely living without easy trade. Money provides a mechanism through which I can trade my time with someone else’s.
The discussion of money as a function of time is mostly limited to frugality. Why expend ten hours of time per year to make homemade laundry detergent if the savings is only $50 per year? Is your time worth more than $5 an hour?
Of course, this topic (like many others) isn’t always so simple. Just because I earn more than $5 per hour working does not mean my marginal cost is always $5 per hour or more. I waste a few hours a week, which could probably be better spent making $5.
Alas, I’m still going to turn down $5 an hour. Lazy is worth five bucks an hour.
Time Loss Aversion
The human preference for loss aversion is best demonstrated in marketing. Consider the following “transactions” which place a value on our time:
- Commercials – There are 8 minutes of commercials on TV for every 22 minutes of content. A TV show can be purchased online for $.99 without commercials, thus valuing our time at roughly $.125 per minute, or $7.50 per hour – 5 cents less than Federal Minimum Wage.
- Online Commercials – Hulu shows 3.5 minutes of ads per 22 minute show, which values our time at $12.02 per hour. That’s a significantly higher rate than offline advertising.
I assume the difference is made up by the difference in advertising effectiveness and different CLVs per audience. Regardless, I would venture to guess that many people who value their time at far more than $12.02 per hour watch Hulu rather than pay $.99 for a TV show.
- ATM Advertisements – A new form of swapping time for money, a company known as “Free ATMs NYC” is seeking to displace ATM fees with 10 second advertisements. ATM users can agree to watch a 10 second ad and use the machine for free, or instead pay $3 (thus valuing their time at $1,080 per hour) and avoid the ad altogether.
This is a far more interesting case, since it appears that the ATMs are at least somewhat subsidized by business owners who agree to house an ATM in their business. One bar owner found that a free ATM brings foot traffic. This foot traffic apparently converts into occasional customers. Customers already in the bar also have easier and free access to more money for more drinks, food, or other goodies the company sells.
Obviously how much we enjoy something will be included into a calculation for the market value of our time. Interestingly, on almost every article related to the new ATM service, people are leaving negative comments. It must be due to the bank-hate going around, I don’t know.
I haven’t ever paid an ATM charge. I probably won’t ever pay one. A Visa and Mastercard credit card is good enough to avoid cash for 99.9999% of transactions.
Even still, if my choices were to pay a $3 fee or watch a 10 second ad, I’d surely watch the ad. I find it hard to believe others wouldn’t.
My time is decidedly worth far less than $1,080 per hour. How about yours?
Photo by: Simon Shek