Utility, happiness and cost

Today I want to introduce the concept of utility, and explore how it relates to the central theme of this blog: happiness. In my previous blog post on the marginal utility of money I proposed a money-happiness curve like this one. Generally as we spend additional money to become happier, there is usually a diminishing return on our investment.

It sure would be nice if happiness could simply be a nice easy graph like this one. It’s such a beautiful smooth curve. And while it is visually appealing, it is unfortunately not reality.

 

The truth is that while the general idea is correct, the slope of the curve is different for each individual item or service we purchase in our lives. Maybe when they blend together they look something like this, but individually they are all over the place. We cannot assume everything in life will fit this curve.

 

Additionally, ‘happiness’ is a simplification of what we are measuring. I’m sure a fork, bookcase or car can cause happiness, but I think a more accurate descriptor in these instances is utility.

 

Utility and happiness are different

An object may bring us both utility and happiness, but usually utility is the primary function and happiness is the secondary function. Think of it like this:

In general, the utility function of an item is fulfilled before its happiness function.

 

What the heck does that mean?

 

Most things we have serve a purpose. They do something, or have utility. This is their primary function. It is unlikely an item with no utility will bring us happiness. It first has to be useful.

 

As something becomes fancier and more luxurious, often times the utility does not change much. Only after utility is filled, do we obtain additional happiness. It is not always that simple, but the concept will help you make better decisions.

 

Let’s use a couple of examples.

 

This is a fork…and for some reason corn on the cob.

 

Anyways, forks are a pretty mature technology. There is not a whole lot you can do to a fork to make it function better. Forks also have an absurd variability in price from nearly free to hundreds of dollars (I’m excluding collectable forks which may range into the thousands). This is the cost-utility curve of a fork. The dotted line represents maximum utility. Above this line is happiness.

 

Notice that once we reach a certain price point with a fork, we are hard pressed to squeeze any more happiness out of it. I’m confident I could assemble a perfectly functional set of mismatched forks from garage sales for the small pile of change on my dresser.  They would work just as nicely as a brand new set of elegant sterling silver forks crafted by the finest artisans. They both have the same utility.

 

As it turns out I did neither. I went middle of the road, somewhere between garage sale fork and Trumpian luxury fork. I have a nicely matched set of inexpensive silverware some kind soul gifted us from our Target wedding registry.

 

Don’t judge me. I know fork connoisseurs everywhere will be appalled.

 

But you see, there is no amount of additional ‘fork money’ that could buy me any more utility or happiness when I’m eating my beans and rice.

 

I’m maxed out.

 

I am perfectly positioned on the graph. Any more money spent and I would not notice a perceptible improvement in my quality of life. In fact, if I waste that money on a fancier fork there might be something else I could not buy (or would be forced to buy lower quality than I want). This is the essence of opportunity cost by the way.

 

Now, I would probably be slightly less happy if all my silverware was mismatched or different sizes or not beautiful. The aesthetics of the set table each night as dinner approached would be slightly degraded. It might be slightly disconcerting when the forks fit poorly in the utensil holder because they don’t line up perfectly with each other. Maybe the tines are not lined up and peas more easily fall off when bringing the fork to my mouth.* These are small costs, but they are indeed costs.

Again, don’t judge me.

The bigger question is how did I arrive at this decision? How did I take care of this ‘fork problem’?

It’s simple really.

 

• I maximized utility.

• I optimized happiness.

• I minimized cost.

 

 

I didn’t sit down with excel spreadsheets and graphs for a fork purchase (don’t worry, I won’t judge you if you did). Much of this was processing that went on in the background. I just kind of came to the decision knowing it was somewhere acceptable on the ‘fork-utility-happiness’ graph. As it turns out I am darn good at purchasing silverware.

 

Example #2: Car

 

A car is a much more expensive, and complicated product. We want to get this right. The cost to us is greater than if we make a mistake purchasing flatware. Remember the wage slave time-money graph? I’ve placed forks and cars on the graph for your viewing pleasure.

 

If the average price of a fork is $1 (and that may be a little on the high side) and the average new car is $33,560 (probably higher today), I hope you realize where your time and energy should be spent. Understanding utility functions are obviously more important for cars than for forks.

 

There is a certain minimum price to get a reasonably functioning and reliable car. Let’s say $1000 for sake of argument. I don’t know if this is true or not. The exact numbers don’t really matter so let’s go with it for now.

 

Below this price level I assume most cars are either so unreliable or require so much money to get into acceptable shape that their utility would be near zero unless it was my only option. But since a $1000 car is the bare minimum of acceptable, and cars do not age like fine wine, soon this car will be of limited utility. Thus items that wear out or depreciate have the additional problem of decreasing utility over time.

 

Fortunately this was not really an issue with our fork.

 

I’m fairly confident 10 years from now the value of my fork on the secondary market will be similar to what it is now (just about zero).

Back to the car

So let’s say $5000 is the minimum price for which I think I can get a car that is good enough for my fancy needs. After all, I do take emergency call and I really do need a car that has a reasonable chance to get me to the hospital.

 

This number will change for you depending on your savings, income, needs, etc. There is no one size fits all utility function. You need to decide for yourself what your curve looks like.

 

There is also the more complicated question of how this utility function will affect other utility functions. Perhaps you would be fired from your job or lose opportunities if your car broke down several times and you missed work. Maybe the image you project with a $1000 car would affect you negatively (I’m thinking of someone like a realtor that drives people around to look at houses).

 

If your time is worth $1000/hour you may value a reliable car differently that someone making minimum wage at Burger King. For this CEO type person, always having a very new and reliable car has a very high utility, as missing a couple hours of work would be quite costly.

 

Older cars may have more or less expensive parts. Insurance and licensing costs will vary. Also one may consider the safety features of a $1000 car. Certainly cutting-edge safety features has some utility.

 

You get the idea.

 

I’m sure we can dream up more examples, but in this case one could imagine that buying a slightly newer, nicer or mechanically sound car would rapidly increase utility. You can see how this calculation gets really confusing and complicated very fast. Many people have difficulty making these calculations, including myself.

 

My car-utility-happiness graph may look something like this:

I put 4 cars on this graph: A $2,000 beater car, a maximum utility car, my car, and a fancy CEO car.

 

At some point, we arrive at a place where the utility function is satisfied. Let’s say this represents a brand new reliable car with all modern safety features, and which fulfills the lifestyle needs of the buyer (me). For a medium entry level sedan this may be around $16,000. This is the max utility car.

 

As I go up from this $16,000 level I am not really trying to buy more utility, I am trying to buy happiness. After all, a really nice and fancy car may make me happier. This is what the advertisements imply anyways. The car we drive defines our manliness (or womanliness) right?

 

There may be a little added utility in additional features, but we are really paying for things like comfort (nicer seats, quieter ride), aesthetics (beautiful materials, better sound and acoustics), our image, ego, social proof, etc. For a few people these may have utility, but for the vast majority of us I would doubt this.

 

I’m not really missing out on opportunities, career or otherwise, because I don’t drive a brand new high end luxury car instead of a Toyota, and you probably are not either.

 

I don’t know if you have been in a high end luxury car, but boy are they nice! From my limited experience once you get in the $70k-$80k range there is not much more you can buy that will make the car ‘better’ from a practical ‘get from point A to point B in safety and comfort’ standpoint.

 

Most people with reasonably high incomes buy a car somewhere in the middle. I did. The average new car purchase price is somewhere in the low 30k range. In retrospect my decision was not entirely rational. Although I maximized utility, I probably crept too far up the cost happiness curve. Notice the rather flat slope of the curve from 16k to 27k. The Shaded area represents additional happiness. I didn’t get much additional happiness for my 11k. Sometimes I wonder how that money may have been better allocated.

 

It wasn’t a crazy purchase. I did temporarily get a little more happiness. I certainly could have done much worse, but I’ve built systems into my life where mistakes like this don’t really matter in the grand scheme of things. This article is for people who do not have that luxury, which, as far as I can tell, is almost everyone I know.

 

What is the point of this exercise?

If you embrace the principles I discuss on this blog, you know that beyond a certain point we cannot buy happiness in the long run. When we try it is usually fleeting. Often times it is pleasure, not really happiness. When we are on a reasonable part of the graph we don’t move the needle much by spending more.

 

I propose the best way to maximize freedom, time, and happiness is by using money to first buy maximum utility before trying to buy happiness. When we buy adequate utility in our life, we create the conditions for happiness to emerge.

 

If you are unhappy with your job, burned out or depressed, you cannot buy your way out of it. It is not really possible. I’ve seen many people try, and very few succeed in the long run. We adapt to whatever improvements we make and it becomes our new normal. We actually may weaken our ability to be happy with less and we may come to believe our happiness is dependent on consumption. This is a dangerous mindset.

 

My new car is fine, but I’m used to it now. It doesn’t really bring me any happiness. It certainly doesn’t make me happier than spending time with my family, going for a walk, or enjoying a good book from the library.

 

A final example

Recently we replaced the carpet in our house and completely repainted the interior. It looks nice, it really does, but I am no happier. I was for a short while, but now it is in the background. I’m not saying don’t make your house beautiful, but understand the marginal utility of doing so. Understand the opportunity cost of not being able to spend that money on something else.

 

This stuff won’t really make you any happier. I know this has to be true because I’ve been in houses with much nicer stuff in them than mine, yet the inhabitants were not satisfied. I have also been in houses with things that are of much lower quality, yet the people are perfectly happy, maybe more satisfied than I am with all of my fanciness.

 

We can train ourselves to be happy with whatever we have.

 

Money is most efficiently spent buying utility.

 

Money is inefficiently spent buying happiness.

 

The curve gets pretty flat trading money for happiness in many instances. If you can recognize this your wasteful spending will plummet.

 

Now I know some people are reading this right now and don’t believe me. They are thinking of all the things that are luxurious that bring them happiness. And they are right. The curve often does keep going up. But if that is the biggest source for increasing happiness in your life, maybe there is another problem. Maybe the things in your life that can truly bring unlimited happiness are missing. Things like meaningful relationships, love, affection, time, beauty of nature and freedom. These things can be nearly free.

 

This is where we should be looking for happiness.Happiness is more a skill and mindset. Happiness is acceptance and gratitude. It won’t be found by upgrading from an iPhone 6 to an iPhone 7. It won’t be found in a fancier car or better fork.

 

Buy utility.

 

Buy freedom.

 

Spend what’s left on happiness.

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*I guess I could always use a spoon in this case.