Optimization of everyday life: Making better decisions

Most of the time we don’t make rational decisions. Much of the time we can’t – there’s too little information and too much uncertainty. But if we can start to use some numbers, we can make the comparisons simpler, less subjective, and give us more of what we want, more often.

That’s the point of this post – and I’ll get back to that in a minute…

I have been reading Common Wealth, economist Jeffrey Sach’s take on how to make the world a better place. This morning, I came across his chapter on the economic proposition justifying social welfare – how increased taxation with a corresponding increase in social services can be fiscally responsible and yield quantifiable social benefits. While his argument was quite one-sided – after all, it’s his book – it got me thinking how we can use a bit of mathematics to make better decisions. Sachs was asking this sort of question:

If you were in government and thought that you had too much money, would you cut taxes or increase social welfare?

But I was thinking about my everyday decisions.

In the next few months, I have a number of flights scheduled though not yet booked. For example, I am due to fly from Sydney to Brisbane sometime after 7pm on the evening of 28 January. That route is mainly serviced by Qantas and Virgin Blue at that time. So how does one decide which flight to take?

At first glance, Virgin Blue is the easy winner. Virgin Blue’s DJ999 is available at $79 fare while Qantas comes closest with the QF556 is $98. That’s $19 difference.

But when you look closer at the Virgin Blue fare, you find that $79 doesn’t give you any check-in luggage. If you want to check-in luggage, that will be an extra $10 for a total of $89. So we’re down to just $9 difference.

Virgin Blue still gives better deal.

What if we take into account the quality of the experience?

HTC HD2 - my new phone :)
HTC HD2 - my new phone 🙂

That’s hard to do, but let’s try. Having flown this route dozens of times, I find the 90 minutes passes very quickly. I have my wonderful noise cancelling headphones and my HD2 to entertain me, and magazines to catch up upon. However, Qantas offers refreshments – Virgin Blue does not. If you’re the sort of person who likes to have a snack onboard, lashing out the extra $9 to fly Qantas seems a really good deal – and I love that fancy fruit juice that they have.

So this is where some judgment is required. If you value the muchies on board, the meal might be worth $10 or so. But even if you don’t value them much, having a drink and some snacks is probably still worth $5 or so. Of course, if you’re just going to sit down and sleep or something, maybe it’s really worth nothing to you.

After all, this is public transport, isn’t it – just a fancy type of bus with acceleration that can really blow your hair back, right?

It is nicer to fly Qantas though. Don’t get me wrong Sir Richard, Virgin Blue is great. But Virgin Blue is clearly a ‘cut price’ or low cost operator in this field and the service standards that you get from Qantas are generally at least a little bit (and often quite a bit) higher. How much is that worth? For a 90 minute flight, for me it’s not really worth too much – but it is worth at least $5.

Does that change things?

Well, we started with the Virgin at $79 and Qantas at $98. If you want to take some luggage, it’s $89/$98. With the deemed value of the food ($5) and general service experience ($5), Qantas has a better value proposition, remaining at just $98 with Virgin’s effective cost at least $99… unless you are just going with carry-on luggage, in which case Virgin Blue still has a $9 advantage.

So fly Qantas when you have luggage and Virgin Blue when you don’t?

Not so fast. What about Frequent Flyer Points? Now I don’t know the Virgin system too well – I tried to sign up for it five years ago but after they lost my application, I never got around to applying again. But I do have a (very) active Qantas Frequent Flyer account. If you have a Velocity account, let me know how much the points are worth and I’ll think about updating this.

That same flight on Qantas would yield 1000 Frequent Flyer points.

Good to know, but how much are they worth?

I’m glad you asked. And the simple answer is, “it depends… but at least $8.50, and probably more like $13.80 for me.” (I’ll explain the messy details at the end of the post)

And THAT in turn brings the effective cost of the Qantas flight down by at least $8.50.
So we have the following value propositions:

Virgin Blue: $79 (without luggage, without food, with cheaper service experience)
Virgin Blue: $99 (with luggage, allowing for the food and service experience deficit)

Qantas: $84.20 (with luggage)

So, Qantas is only $5 more, even if you don’t check-in luggage!!!

For me, the extra comfort and convenience of having some food on the flight and traveling in just a little bit of extra comfort is clearly worth an extra $5.20. And if I’m checking luggage, it’s actually about enough cash saving to cover my Irish Nut Creme from Gloria Jean’s at the departure gate…

Most of the time we don’t make rational decisions.

Much of the time we can’t – there’s too little information and too much uncertainty. But if we can start to use some numbers, we can make the comparisons simpler, less subjective, and give us more of what we want, more often.

For example, I want my son to have the best education – but it’s pretty tough to say where he’ll even be attending school, never mind where the best place for him to attend might be, nor what schools will even be like when he is due to start high school in 2023! Emotionally, I’d love for him to go to State High like I did – I think he’d enjoy being a fourth generation State High student. Yet I put him on the waiting list for a private school earlier today.

On one level, our decisions reflect our values. For some people, all that matters is price. But someone with strong brand loyalty to Virgin Blue might never even consider flying Qantas – no matter what the price. Someone who vehemently opposed private schools might never even consider their child attending one. Most of us have these biases but values are easily left tacit and their impact overlooked and unacknowledged.

Many of our decisions are irrational.
So often, we do things that won’t get us the best outcome, no matter what our values, no matter what our intentions. It’s easy to see why – there’s just so much information that our brain can’t process it all at once. But if you can break down a complex problem into the different components, you might just have a chance to put your own price on something that has no price… and give yourself a chance to make better decisions.

If you’re interested, we can look at the value of those frequent flyer points…

It’s kinda complicated because you need to deal all the different uses that you might have for the points that you generate. But for me, I’m most likely to use points to fly either between Shanghai and Brisbane or Brisbane and Sydney. You’d think that they’d be worth the same either way, but they’re not.

Let’s start with the same Sydney to Brisbane flight. Booking it through points will cost 8000 points plus about $11 in taxes. If we compare that to the Qantas flight, that gives $98-$11=$87 for 8000 points, or $0.01875/point or 92 points/dollar. If you were after the worst value use of those points, you would have to compare that points flight against a luggage-free Virgin Blue flight. There, it’s just $79-$11=$68 for 8000 points, or $0.0085/point or 118 points/dollar. Hence, at a minimum those 1000 points are worth $0.0085*1000 or $8.50.

Using points to fly between Shanghai and Brisbane will cost you 72,000 points – plus about $200 in taxes. Paying cash for the same flight might cost around $1200 (including taxes). Based on those figures, it’s pretty easy to work out that 72,000 points is worth about $1000. At that rate, you’re looking at points being worth $0.0138/point or 72 points/dollar, making 1000 points worth $13.80.

Thus, the value of your points will vary by at least 62% depending on how you use them!

2 comments on “Optimization of everyday life: Making better decisions

  1. At first glance this article looks a bit pedantic on how a decision is made. Yet when I look at how I make a decision, it is very much like that! Good work, Daniel, for stepping it all out.
    But if we don’t make rational decisions for your stated reasons, then how about accepting the decision we make knowing we never make rational decisoins?

  2. Once you can define your criteria for success – in this case cost-effectiveness – it is rational to be precise about our thinking.
    When you don’t have criteria for success, or don’t care to think through what you’re doing, it makes sense to happily bury our heads in the sand… we’d also have to be prepared to live with the knowledge that we might be walking east looking for a sunset. But sometimes the walk is nice.

Comments are closed.