The Value of Money

Recently I have been thinking a lot about my personal brand and reputation.  This led me to question what I value, why I value it and how I can put those terms down on paper in an organized fashion.  It is this activity that will allow me to take control of those variables which are ‘me’.  Too much of this ‘me’ is exposed through unconscious activities.  Without identification, the perception of ‘me’ is exposed through socialization routines, biology and unconscious decisions.  It is only through tough analysis that ideas can be properly related and connected.  This conversation with myself is the result of asking the question, “What makes ‘me’, me?”

When I was a kid, I remember asking my dad, “Is $100 a lot of money?”  I don’t remember his response exactly.  It must have been something like, “Asking if something is a lot or a little is only answerable if you relate it to something else.”  Of course if I said, “Is $100 a lot of money to purchase a brand new BMW?”  There is an obvious answer here.  Now had I asked, “Is $100 a lot money to purchase a snickers bar?”  This also has an obvious answer.  The point being that asking about $100 is shorthand for, “Is the work required to obtain the value represented by this $100 bill a good trade for my perceived value of this thing?”  The $100 bill as an object has almost no value.  As an abstraction though, it is worth precisely $100 at this moment in time.

What follows is my interpretation of how currency has hidden so much of its true value.  This is not an attack on our monetary policy.  It is meant as nothing more than an examination of value which I believe is too rarely addressed.  Remember, cash is made up.  It represents only those things we allow it to represent.  Rich people with lots of money are only better than us if we allow ourselves to believe that cash can be used as an accurate representation of who we are as individuals.  I reject this notion directly.  While currency is a requirement for our world to function, what it represents must remain in our thoughts.  We must be cautious not to let our beliefs assign value to currency which was never intended in the original models.

The problem with currency specifically is that it’s so far abstracted from reality that the subcomponents have been replaced by the model.  Currency is nothing more than a representation of value.  The question of value has hundreds if not thousands of individually identifiable variables.  These variables are buried so far down the stack that a dollar is spoken of as if it were an actual thing and not simply a representation of value derived from a model.

This is an issue with all aggregation and abstractions.  They hide details.  That is their intent.  Models are the basis used to form these abstractions.  It is the goal of models to limit the variables in order to express complex ideas is simpler, testable terms.  There is an accuracy loss when this happens.  Aggregations, abstractions and visualizations all contribute to what I call, ‘Accuracy Loss Events’.  Each step up the chain simplifies the view, increasing the amount of consumable data, but at the cost of accuracy.  Running these numbers back down the chain can often lead to very different starting points from the original.  Extreme care must be taken when aggregating and abstracting individual values.  Consider this very general example:

abstractionLoss

As you see, through rounding, averaging (mean and median) and averaging over time, the individual details of the transactions are stripped of much of their accuracy.  Imagine that this was a large number of stores.  We could even calculate standard deviation from norm.  This would take a figure, say $4.728 million, a relatively exact count of money, and turn it into an abstraction such as 1.2 sigma.  The process to go from $4.728 to 1.2 sigma is much easier than going from 1.2 sigma to  $4.728 million.

In fact, at the top of the triangle, these numbers have changed state from approximate values to colors on a dashboard.  While there is nothing malicious about the process, as I said before, extreme care must be taken so the data is not misrepresented.  Each step up decreases the difficulty in misrepresentation and increases the likelihood that the misrepresentation will go unnoticed.

I have mentioned the Economics class I am taking from Coursera in the past.  As part of this course we learned how to evaluate value and compare its components against each other.  This technique removes the question of currency and displays the value of the X axis in terms of the Y axis.

For instance, should I stay home tonight and clean, or should I go to an Industry networking event and pay a service $40 an hour to clean for me.  My initial reaction has always been, “I am not paying someone to do something that I can do for myself relatively easily.”  In the past, I viewed the cost simply in terms of the money I loose.  In this case, the cost would be $80 I would pay for the service.  If someone asked what it cost to have my house cleaned, I would respond, “It cost $80.”  This is a vast over simplification of what I am trying to express with this statement.  5 words and I have communicated a large amount of information in such an abstract and aggregated way that there is no way to get the details.

This is the problem with over reliance on currency to represent value.  It has so far abstracted the concept of value that with the simple use of the phrase $80 dollars, I have aggregated a large number of variables so far that I don’t even see the individual properties.  It is a classic example of not seeing the forest for the trees.

Let’s pretend there was no aggregate called money which is represented by currency.  In this case, my response would have been.  “The service to have my house cleaned cost me X number of hours.  This relationship of hours work to value earned is based on a cost/benefit agreement between my employer and I.  Its terms consist of the value I bring to the organization compared to the cost of keeping me as a member of the team.  The value I bring is an aggregate of:

  • The money I bring into the company.
  • The value I provide to my fellow team members.
  • The percentage of hours per week which I, on average, am available to service requests.
  • The amount of time it takes me to honor my agreements compared to the average.
  • Etc., Etc., Etc.

My cost to the company is an aggregate which is composed of my salary, my office space and my insurance.  The insurance cost is an abstraction of my likelihood to suffer injury compared to the general population in my age range which is yet another aggregate…  The cost of my office space has even more hidden details comprised of the city my office is located in… and on and on.”

It’s a game how many times can your child ask why.  Every abstraction of value is supported by yet another abstraction of value.  From here on, its turtles all the way down.

My fondness for opportunity cost diagrams is due to their ability to remove layers of the aggregates built into our currency.  With this model, I don’t say something “cost me $80”, I say the “cost of cleaning my house is 1.2 two hour networking events.”

Because we are discussing value, abstractions must always exist.  However, right or wrong, opportunity cost graphs give me a feeling of control over my decisions.  So, without further ado, I am going to do one of these diagrams to answer this specific question.  “Should I stay home and clean or go to the networking event?”

Assumptions I am going to make:

  • I make $20 an hour.
  • The networking event will take exactly 2 hours.
  • Cleaning my house will take me 3 hours.
  • A professional service cleaning my house will take 2 hours.
  • The networking event will provide some number of actionable leads.  For each hour at the event 2 hours of work will be generated.
  • The networking event will provide 2 additional industry contact.  Each of these contacts is worth 2 hours of work over the course of the next year.  They can introduce me to other contacts.  They can help answer questions which save me time at work.
  • Being seen at the conference will increase my visibility in my industry resulting in 1 more hour worth of work over the course of the next year.
  • The stress of maintaining these new contacts, missing out on relaxation at home and being around family members who make me feel great will cost me 1 hour worth of work.  This stress could consist of thank you emails I have to write, lunch dates I have to attend, kids play date requirements etc.
  • The happiness gained from accomplishing the house cleaning myself and making sure everything is specifically where I want it is worth 3 hours.
  • All other variables have been removed from consideration.

So, to calculate my value coefficients for each option:

I clean my house

  • -3 hours time lost
  • 0 work hours cost of cleaning
  • 0 hours of work gained from contacts
  • 0 gain in social circle
  • 0 gain in visibility
  • +2 hour family time
  • 0 hour stress cost
  • +3 hour gain from happiness

I go to networking event

  • – 2 hours of time sunk
  • – 4 hours of work cost of cleaning
  • +4 hour of work gained from contacts
  • +4 hours of work gained in social circle
  • +1 hour gain in visibility
  • -1 hour family time
  • 0 hour gain from happiness

The results:

I clean my house: +2 hour net gain

I go to networking event: +2 hour net gain

This means that each hour at the networking event is worth the total value per hour (2) / number of hours (2) of spent resulting in a 1 hour of work net gain per hour at the networking event.  The cleaning took 3 hours for a total of +2 hours of work net gained so the result is 2/3 or .67 hours of net gain in working time.

Another way to say this would be: that .67 hours cleaning = 1 hour networking or 1 hour cleaning is worth 1.3 hours networking (accuracy loss event: rounding).

Now let’s hold everything stable and play with 10 total hours.  You could spend your 10 hours cleaning your house and other people’s houses or go to 10 hours’ worth of networking events.  You could also mix it up.

opcostgraph

The graph shows the value of the networking event in terms of the house cleaning.  The yellow section is unreachable as there is no way to get there with the resources allocated within the 10 hour time limit.  The red section is an inefficient usage of resources.  The blue line however is known as the ‘Production Possibilities Frontier’.  Every point along it represents an efficient usage x axis in terms of y axis.

So in conclusion, I think it is important that we pay attention to the actual value of our time regardless of the monetary assignment given to it.  I certainly understand that at some level of the economy many decisions are made of necessity and outside this sort of analysis.  It must be accepted that to even ask this question means that the original $80 is available to pay the cleaning service.  Regardless of the functionality of this sort of analysis, I still find it quite insightful to ask these particular questions.

 

Micah Norman

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