Tuesday, August 25, 2015

Utility - In Another Sense

Utility, in an economic sense, is defined in Investopedia as:

"Utility is an abstract concept rather than a concrete, observable quantity. The units to which we assign an "amount" of utility, therefore, are arbitrary, representing a relative value. Total utility is the aggregate sum of satisfaction or benefit that an individual gains from consuming a given amount of goods or services in an economy."

I became familiar with the term "utility" in this regard from Jordan Ellenberg's "How Not To Be Wrong" and it intrigued me.  Business Insider and Smithsonian give nice summaries of its use in the book here and here respectively.  The gist of it is that everything comes with a cost and you need to ask yourself what cost are you willing to pay for a level of comfort.  It is an "inconvenience factor" and Ellenberg measures it in utils.

The book explores the case of a passenger heading to an airport.  Say an hour of time wasted at the airport that could have been spent doing something more productive costs someone 1 util.  However, the cost of missing the plane is 6 utils.  We have three scenarios:

a)  2 hours early x 1 util/hour + 2% chance of being late x 6 utils for missing the plane = 2.12 utils total cost

b)  1.5 hours early x 1 util/hour + 5% chance of being late x 6 utils for missing the plane = 1.8 utils total cost

c)  1 hours early x 1 util/hour + 15% chance of being late x 6 utils for missing the plane = 1.9 utils total cost

Utility can be positive or negative - you want to minimize negative utility usage while acquiring positive utility.  Be greedy with your positive utility; unlike the avaricious accumulation of money, there are no negative side effects of positive utility accumulation.  Be stingy with your negative utility - and don't trade it for just anything.  In the above example, say you estimate that making your flight is worth +3 utils and that number doesn't change for any of the above three scenarios.  So, for a) you end up with +0.88 utisl; b)  +1.2 utils; and c)  +1.1 utils, assuming you make your flight.  The right answer is "b", which results in the overall highest positive utils of the three options. 

The result, of course, changes depending on how you value making your flight against what value of utils you assign to wasted airport time.  Util value will vary from person to person; there is no standard util cost for missing a plane as each person values his or her time differently.  Additionally, it is impossible to assign an exact number of utils to an activity, but the idea should not be lost.  As Ellengerg puts it, "The output is qualitative, not quantitative." 

Besides, I'm not promoting calculating out your estimated utility usage for all of your daily activities (that would cost ANYONE a lot of utils, right?), but I am an advocate of constantly maintaining a cost/benefit mindset in even the most trivial tasks.  I've discussed some hacks here and an analysis of the lives of two different fictional characters here that illustrate this process. 

Being a budget shopper with your utils will benefit you exponentially in the future.  Have a thorough understanding of which activities you value above others and then budgeting your utils will be an easy task.  Keep your ultimate goal at the forefront of your thoughts and expend your utils only on activities that bring you closer attaining it.  You'll be amazed at the compounding effect of those positive utils!

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