The Good Side Of Inflation This week, in a conversation about quality of life with respect to the prices we pay, I found myself making the very same argument I made fifteen years ago with a friend in Zurich.
A “good” side of inflation: people indeed get more frugal, even though technically, if their income rose by ~21% and the prices rose by ~18%, life is the same (the difference in %s is because tax brackets generally lag behind in their change rate).
Now, fifteen years later, I can probably phrase it a bit better.
The original question was: how does money really affect your quality of life? And, in the course of answering it (naturally, after food, health, babysitters, and kids’ education is covered), the topic inevitably gets to travel.
Warren Buffett once noted that his quality of life is on par with what most people in America’s heartland enjoy, except travel — where the difference is, of course, drastic.
So, let’s consider hotel prices. Here’s the argument I made back in ~2007, remastered.
Imagine you found yourself in a place where a cheap hotel is ~$7 a night, a decent one is ~$25 a night, and a fancy one starts from ~$40 a night. Now, say, your flight was moved to tomorrow, and you need to stay another night.
Well, air fares don’t change much, so, for most people who fly on their own expense, an extra ~$10 or ~$20 per day would not make a dramatic difference. In other words, I expect you to not really look at the price when choosing the “best” hotel. There likely is a difference between a ~$15 hotel and a ~$35 one, but I can easily imagine you picking the cheaper option for a random arbitrary reason. Maybe you walked past it yesterday and liked the bar on its roof. Or maybe you plan to attend a show tonight and know there’s an okay hotel in three minutes walking distance from the venue.
For bonus points, imagine a friend tells you: book soon, the prices may well hike by a dozen or two percentage points! Well, in my case, and, presumably, for most people who would read this, such an argument would be moot. Why bother and why rush it if the opportunity cost is in the order of single-digit dollars? In such a situation I would absolutely value my peace of mind more, and would, most likely, succeed in having my heartbeat increase by a yota in light of this new “important” information.
After this exercise, say, you found yourself in an expensive place. New York, Zurich, Singapore, Tokyo. And, somehow, you’d need to spend another night there.
On a busy day, a cheap hotel may well be ~$75, a mediocre one ~$150, and the fancy ones would be $250+.
Admittedly, even writing the previous paragraph makes me a bit tense. Because a few times in my life I was in such a situation, and, while a one-off expense in the order of $100 is not life-changing, deliberating on such a choice has its emotional toll.
And this is true despite the fact that, if it’s me in this situation, it would be a business trip. So the hotel would certainly be tax-free, as a business expense, and I’d give it far greater than a coin flip chance that whichever business I was there for would just cover the cost retroactively. Interestingly, this very knowledge does not take away the tension at all.
So, here’s the argument I was making fifteen years ago. A truly wealthy, or at least an upper middle class, person would not have their emotional responses differ in the cases where a hotel is $7 / $25 / $40 vs. $75 / $150 / $250+.
Unironically, I’m failing this test miserably ;-)
Even back in Europe I played poker, had a deliberate goal to make a $1000+ (it was EUR1000+) bluff, and found a way to pull it off one day.
Even though when I started dedicating some time to the stock market, one of my goals was to not get emotionally attached to the highs or the lows (and this goal I did succeed with, as evident from today’s events).
And even if I’m ~95% sure a business I’m helping would cover the cost of the hotel, whether it’s $50 or $350. It still makes me considerably tense when such a “choice” emerges.
My life hack, btw, is to use points to book a hotel when it’s expensive: keep enough for one or two nights, pay cash on the cheaper days, use points if the cash value is high. This trick converts the negative emotion of “jeez, so expensive!” into a positive one of “look how clever I was to save those points for a day like this!”
So, in some sense, there is a truth to the statement that wealth is in one’s mind, not in one’s wallet. Because, for most of us, between spending an extra $100 a year on unexpected hotels vs. worrying about some expense being above a psychological threshold, one is better off “investing” those $100 a year into emotional comfort. Yet, we (well, most of us, I assume) routinely sabotage ourselves by worrying unnecessarily, where no f*cks are best to be given.
Looking at my financially fortunate friends, by the way, their emotional experience appears to be similar to mine. Quite a reproducible human bug, isn’t it?
The above also highlights one of the “bright” sides of inflation; at least in the sense that Greta fans would appreciate. As wages and prices go up, the perception of those dollar figures by the humans stay about the same. Thus, even if (post-tax) earnings do keep up with the rising prices, people would naturally get more frugal as the prices grow. If anything, this helps improve the carbon footprint of our civilization!
