*This post was actually written and rewritten months ago and exile is giving me an excuse to finally publish it. Hope it doesn’t offend anyone, but I know many will disagree, because I’m pretty sure half the people in this hobby use the phrase. But here we go…*
UPDATE July 24, ’15: It would be nice if you comment after reading the post. Because I say the following three things explicitly, but apparently no one bothered to read these things, so I’ll put them at the top…
1) There are many examples of the phrase “opportunity cost” being used that don’t fit the description of limited resources. Choosing between two cards now, doesn’t mean I can’t also get it later.
2) There are many examples of valid opportunity cost, but many of them don’t have “economic costs”, aka monetary value, aka it doesn’t cost you money. So neither of these examples prove travel isn’t free.
3) There are some examples of valid opportunity costs that require passing up money. But just because these examples apply to you, doesn’t mean they apply to everyone else. You took off work to go on vacation? Great example for you, but it doesn’t mean that everyone else will have to. Passed up spending on your 2% card for a 1% card? Good, but that may not apply to everyone else just because it applies to you. Coming up with another example that applies to you doesn’t disprove the article…
Take it easy folks… Back to the actual article…
The point of this article is that not all examples are actual opportunity costs, not all of them are economic costs, and not all of them apply to
It doesn’t matter how free something is, there’s always a genius in this hobby who remembers the phrase “opportunity cost” from a barely passed economics 101 course. But… they don’t quite remember what the phrase applied to.
Yes, this is somehow the commonly used trump card to anything free. Most likely motivated out of a feeling of, “I can’t stand people calling travel free when I paid lots of money for my miles”. And that’s probably true, maybe you did spend a lot of money on your miles.
But in order to maintain the position that free travel is not possible, you have to do a lot of ignoring. Luckily, ignoring is a lot easier when you have a misused economics phrase.
“Opportunity cost”.
This is the proof that no travel is free. Apparently not for anyone else.
Anyone?
My school teacher friend got paid $3,000+ cash money to change his summer flight home from Madrid to a later one. This is a flight he paid for with miles earned from a credit card that had zero costs.
Therefore… “opportunity cost?”
I have a friend that applied for 9 cards earning 100,000 AA miles each, and $200 credit. He paid zero dollars in annual fees.
In one year he earned 900,000 AA miles and $1,800 cash money. But, but, but… that can’t be free because… “opportunity costs?”.
It doesn’t matter if you hitch hike, walk, ride a bike, or get paid to fly, someone will hold their position with opportunity cost. The reason is again, because they paid lots of money buying miles, or paid for flights… therefore other people couldn’t have gotten it for free.
*Before I begin: I have good friends who are in this hobby that try to spend $0 on travel and over all have probably come out gaining money (like the examples above). And I have many friends who pay lots and lots of money on buying miles, or pay lots of money on flights to earn miles. Let me be clear that I am passing no judgement on paying money. The entire point of this site is that a person could get a free trip, and many do (and I have). But it is not that everyone must travel like I do, or travel on the deals. If anything, I want to communicate the opposite. Just because you paid money, doesn’t mean people can’t find actually free way to travel. Any one of the ways to travel for free can be used to get a free trip if that is one’s intention.*
This isn’t the proper use of the phrase
At this point, I’m going to have to burst the bubble and say that just because you’ve laid the phrase down like a trump card that explains how earning miles isn’t free, it doesn’t actually mean it’s true.
I feel silly having to explain what opportunity cost is, since seemingly everyone on flyertalk has taken an Economics 101 course, but…
An example of opportunity cost could be if I took time away from one business to start another, will the second company make more money than the first company’s loss by my not being there? So the first company could actually make less profits because I’m not there. Or better example is that the first company could be doing even better and grow more with my attention and creating more value, but instead of creating that value with the first company I now spend it on the second company.
The question is: what opportunities am I forgoing in order to pursue this other project or investment?
At the end of the day is the loss of diverting away from one opportunity going to cost me less than the gains from the new project. In this case you don’t just look at the profits from the new company but the “net” profits after calculating some of your losses.
The two biggest mistakes of things that are actual trade offs are:
1) The resource isn’t limited. Just because you chose between the AA and Hilton card this time, doesn’t mean the AA card cost you the Hilton card… because you can go get the Hilton card next time. Limited resources.
2) People then take a real trade off (like time) and apply a blanket monetary value to it. Reality is most people don’t have a monetary trade off on their miles & points time as they do it after work. But we’ll address both of these more!
In the frequent flyer hobby, it’s all net profit! Few real opportunity cost.
Let me try to emphasize how absurd this is with giving other parallels.
What if I entered some raffle and won the grand price and I had the option to choose between a brand new car and a brand new motorcycle. If I chose the car and it was completely free of cost to me, you wouldn’t say, “well, technically that car wasn’t free… it cost you a motorcycle.” That would be idiotic. The car was completely free, and if the raffle didn’t give the option to choose a motorcycle, then would you have said the car was free?
Same same. 50,000 miles could be completely free and just because you could have gotten some other free thing… doesn’t change the fact it’s free. Period.
Getting a free car is free, even if you could have gotten a free motorcycle instead. See, because having “options” isn’t the only requirement for you to use the phrase “opportunity costs”. While it is true that you would be forgoing the opportunity of the motorcycle, it doesn’t actually cost you the value of the motorcycle. It terms of money, it’s free. But in this hobby people [sometimes] find a valid trade off that isn’t financial, and then try to insist that there’s a monetary cost.
And this isn’t the best example because the car and motorcycle are limited resources, and the parallel isn’t. However, the point here is that just because it has a cost doesn’t mean it has a monetary cost… which is what anyone means when they say “travel isn’t free”. They don’t say “it can be free of money but cost you time” because they mean it isn’t free of money… because they paid money.
As stupid as this all sounds, this is an actual thing. In the attempts I’ve heard to explain how earning 50,000 miles isn’t free, you actually hear “well, you could have applied for this other card”.
And these are otherwise intelligent people who understand the hobby. They know I’ll just get the other card as well (therefore it’s not opportunity forgone). They know, that I don’t have to pay 40,00 Hilton points to get 50,000 AA miles. And they know me and that I’m only getting cards with zero annual fees. I pay $0.
Again, the next thing is usually, “but did you know I paid $___ in annual fees last year”, or “I just took a trip and I paid $___ in fuel surcharges”. My instinct is that it has nothing to do with opportunity costs and more to do with personal experience. But this is the argument they put up. My AA miles “cost” me… because I could have gotten a Hilton card. Takes some mind olympics.
The “cost” part of “opportunity cost” should be an actual cost. (Duh, right?)
When I buy stocks, I could have put that money in savings that would at least give a few percent. That is actual money, and the net profits aren’t free money. I mentioned some of my stock buys in the past and buying AA stock actually cost me money. So when stock went from 40 cents to 40 dollars, that was not free money.
In the same way, if I spend time working at a job, my paycheck isn’t free money… it cost me time.
The qualifications for “free” vs “opportunity cost” is whether or not it actually cost you something. Period. It implies that you have a resource that is limited and will therefore be tied up and taken away from another opportunity.
(I feel like I should make that quote a pretty pintrest picture and put it in the post somwehere).
I’m sorry, but if you say that getting the AA card instead of the Hilton card cost you 80,000 Hilton points… you’re sounding absurd. Those are free miles.
However, if you tied up $100,000 in manufactured spend… that is totally an opportunity cost.
See the difference? One cost you investing something (that’s when you get to use the beloved “opportunity cost”phrase), and the other didn’t cost you anything, despite forgoing opportunities.
Why are people obsessed with mis-using this phrase?
In no other part of life do you have to add “opportunity costs” when telling someone how much you spent. Yet, in this community, some people constantly explain travel isn’t free because of opportunity costs.
But if you told one of the many people who constantly abuse the phrase, “hey, I bought this t-shirt for $20”, they wouldn’t say “no, no! You’re not calculating opportunity costs! How much time did you spend to pick out the shirt? How long was the drive to the mall?”.
The fact of the matter is, most people work 9 to 5 jobs. If they work past 5, they don’t get paid more money. Heck, in many cases they can’t work past 5!
Their time from 5pm to 9 am has a monetary value (remember that’s what we’re actually discussing here) of $0.00 (zero dollars and zero cents). Nada.
If they spend an hour online applying for cards or booking a ticket, it isn’t not a monetary opportunity they missed out on. Period.
Of course, that’s not true for everybody. There are a lot of people in this world with different jobs and financial situations. It would be silly of me to assume everyone is just like me (<– good advice btw). But it’s true for a heck of a lot of people. And it’s true for some people even if it’s not true for you.
Can you “value” your time even if you wouldn’t be making money? Sure (but don’t get me started on “value”). Although my point is that anyone could have a free flight, hotel, or both. And the “free” part is totally about monetary costs.
But again, no one acts as goofy as this in other parts of life. On Ben & Jerry’s free cone day, people don’t rise up and try to convince you it’s not free. They know you have to wait an hour in line, but the “free” part is referring to the price at the cash register. In that part of life, it’s a “duh”.
“But, but… Opportunity costs, opportunity costs, opportunity costs! That ice cream is worth $3 max, and what’s your time valued at?”
Well, when I did “free cone day” in Charlottesville at a local ice cream shop, I was off work and I was with my friends. If I went back to work my boss would have reminded me that we’re closed and I should go home. I couldn’t have made any money. I lost zero dollars.
We can all agree that the above argument over free cone day would be ridiculous. You wouldn’t want to have friends where you’d have to explain the costs of free cone day too.
But when you scale the time and reward to something as valuable as travel… then it’s normal for people to question how free $0 is. Then it’s normal for people who wouldn’t be making a dime during those hours to worry about the value of the time spent. Then it’s normal for people to use the phrase “opportunity costs”, because… I heard that in economics class.
Conclusion
I just want to be clear that I’m not saying all travel has to be free, or that you’re paying too much more for your travel. I’m just denying the idea that “opportunity cost” is a trump card blanket statement that applies to everyone.
Understand that I’m totally fine with misusing the phrase in regards to hierarchy of decision making. Opportunities forgone is still a key part to opportunity costs. Even if the limitation of investment isn’t quite the same, I understand it’s still just a phrase to help one decide on the best opportunity. Totally fine.
I hear this in regard to MS. By taking one bonus you’re passing up another. And for the most part that makes sense, except sometimes people still call it a cost. Remember, not using a citi card is not a cost.
But what is completely unhelpful is the consistent use of the phrase in contrast to miles being free or not free.
Now I understand the frustration. This is is a hobby full of terrible terrible math.
But…
Getting bumped from a flight or signing up for a credit card; just because that time is worth actual money to you, doesn’t mean it also therefore is to everyone else. Not everyone is you.
There are people who actually travel for free. People who have earned 900,000 AA miles and $1,800 from a card. A friend who earned $3,000 from a bump on an actually free flight.
People have hitch-hiked, camped, couchsurfed, gotten free nights via best rate guarantees, and many many many more things.
Just because you chose to spend money for a different quality of travel doesn’t mean that these trips “cost” anything to these other people. And on the other side of the coin, paying for a nice flight isn’t wrong. I’m not attacking anyone for having nicer things than me or more money than me. Just for not knowing what the meaning behind the words opportunity “cost” actually mean. 😀
Free travel is possible and I’ve found numerous ways to do it. But I recognize that most of the community is about getting really good deals on luxury travel. My life is somewhere in the middle.
Part of my obsession with finding actually free ways to travel is sport, and a large part is motivated by continuing my lifestyle. A mix of luxury hotels and club lounges (the one tonight had great calamari with dinner actually), and not owning more than you can fit in a carry on.
Remember, as I learned when trying to carry-on my bag onto an AirBaltic flight: there’s no such thing as “one size fits all”.
![Nick of FM on #40kFarAway [TIF Podcast]](https://travelisfree.com/wp-content/uploads/2019/10/travel-is-free-podcast-nick-40K-120x86.jpg)
I have to disagree with the notion that opportunity cost is only associated with money. Opportunity cost is all about the optimal allocation of scarce resources – of which time is most certainly one. You may disagree and value time differently, but I would argue that most people would place at least a marginal value on their time.
Then there’s the question of meeting minimum spend requirements on your so-called “free” sign up bonuses. You still have to make that spend somehow – that will require some time and some movement of money. I’ll again leave time out of the equation, and assume you would be MSing (or regular spending) on another card that earns 1% or 2%. That is a real tangible cash benefit – a real monetary opportunity – foregone. You may get 100,000 AA miles and $200 out of the new card, but you’re trading the opportunity for $60 (2% on 3k spend) for that privilege. A good trade? Sure! But still an opportunity cost. By definition.
Okay… meet me in the middle here. :-p
(Although I don’t think I said “opportunity cost” only applies to money… although it is an economics term.)
The concept here is about; am I spending money on travel? So if you’re using opportunity cost in relation to something not money… well, then that’s a different discussion.
However, I think your point is that it’s a valid use of the phrase “opportunity cost”… in which case I’ll meet in the middle. 😀
So in regards to choosing one card over the other, it’s just like the car example. We’re choosing between two free things. Agreed that it is an opportunity forgone… but it is not real cost.
The free thing isn’t free because you coulda have gotten more of this other free thing.
Although you make a valid point. In the case of the phrase “opportunity cost”, this is a good example using the card is actually passing up money. But if this and if that. If you have a 2% cashback card, and if you’re passing up regular spend (which you don’t have to do)… if if if. So yes, it is possible that someone has a regular spend and switches a 2% card out for the miles card and missed out on $60 for that time. Probably happens a bit, but not to most.
So… in terms of me having insulted the use of the phrase in the hobby… that’s probably an exception.
However, people still use it to say that the miles aren’t free because it “cost” them $60. And that’s when I say, okay, your free thing isn’t free because of the other free thing. It’s a little goofy, and it ignores many of the opportunities that aren’t tied to spend. Most of the opportunities I’d say.
It doesn’t matter what you are (or are not) spending money on. The fact that you travel for free is irrelevant. The fact that you earn your points by spending money on a points earning card vs. a cash card is what your opportunity cost is.
If you want to get really technical, there is an opportunity cost associated with just about every decision you make, whether you think about it or not. Getting bumped for $3k might be a complete no brainer decision, especially if you are able to do almost everything from point A that you would do in point B, but you are still foregoing something by getting to point B later than you would have earlier (and $3k poorer).
I fully understand the concept, but it’s still not a real monetary cost.
Getting bumped from a flight could cost you time… but your time may or may not have monetary value… depending on who your are, when you work, etc…
And the fact of the matter is, not all miles, points, airline, and hotel related rewards are connected to spending. Some are just a matter of filling out a form. Like the Alaska card, or a BRG. They have zero spending and still could give free travel.
Also, coming up with a hypothetical situation on how you could have gotten more rewards doesn’t make it an “opportunity cost” or not free.
For example, I did a BRG at an IC where they refunded the $400 via check after the stay. I used my IHG card to pay for the stay. I got 2,000 IHG points.
But I can come up with a hypothetical value for it by saying I could have used a 2% cashback card.
So therefore the hotel stay cost me $8 of forgone opportunity?
No. The hotel was still free. Just because I didn’t maximize rewards doesn’t mean that it wasn’t free.
In most of your examples there is a clear lost opportunity cost. The amount of money that would have been received if miles were sold. You can argue all you want that the miles were obtained for free….But if in one scenario you have and extra $1k in pocket from statement credits/selling miles and scenario #2 you have no money but a free flight…..that flight cost you $1k.
Was it $1k out of your w-2 earnings? No….But if you think that matters, then let me introduce you to another economics concept…The fungibility of money
Selling miles is something I do not on the realistic discussion table. It is against the terms and conditions of all programs, and it could result in your account being closed forever.
Well, for you to exclude the sale of points is shaping the discussion to fit you conclusion.
Most of MS is against the T&C and can get your accounts shut down. If you were to exclude every method that is against the T&C, most peoples options would be pretty limited.
Your whole post entitled “Traveling and MSing $20k Cashback a Year” is based on the premise of using a product outside of the T&C. It works, because they don’t have the systems in place to prevent it….much like the selling of points.
But even if you take the selling of points off the table, this doesn’t take into account the redemption of convertible points for statement credit. At the very least UR and MR are worth 1 ppm, meaning that is what you are foregoing by redeeming them for flights/hotels.
The majority of the people here don’t sell points and do MS. Sorry.
Even without those extremely widespread tools, one can always redeem convertible points for statement credit, which is fully in keeping with T&C and available to everyone. At a bare minimum one is forgoing 1cpm by redeeming them as flights/hotels.
Can we at least agree on that? 😉
You can redeem AA miles for statement credit?
>>Even without those extremely widespread tools, one can always redeem convertible points for statement credit, which is fully in keeping with T&C and available to everyone. At a bare minimum one is forgoing 1cpm by redeeming them as flights/hotels.
Can we at least agree on that? >>
…
“Convertible Points”
I think you confuse 2 different concepts. You use opportunity cost and monetary costs interchangeably. Quote (“I fully understand the concept, but it’s still not a real monetary cost.”). I think it is clear that getting points from 1 card is not a monetary cost in itself. It’s a bonus for using the credit card. Now, we can safely assume you would need to use one of the credit cards on the market to make the purchase you were planning to make regardless of the bonus. Thus, we can be certain that there is no monetary cost of points (and therefore a trip). Now you can chose the card that gives you either points, miles, cash back or some other incentive. By choosing any of these options you forego the other opportunities. Hence we call it a “cost”, i.e. “opportunity cost”. It didn’t cost you any money, but it did cost you other opportunities (the foregoing part). Once you make that distinction you realize that choosing a car over a motorcycle is indeed has cost you an opportunity to own a motorcycle. It did not cost you a monetary value of a motorcycle, since you didn’t have to give up the motorcycle you owned prior to winning a raffle. But it certainly cost you an opportunity. Hope that clarifies terms a bit.
Drew, I agree with PoinsForLater in particular on the value for “time”. The fact that you do things for this hobby outside of your paid job doesn’t mean the time you spent on it is less valuable. Some people might value time more than others. If someone would pay you money for you to not spend time with your beloved one, would you do that? How much money would ask for to be compensated? That amount, it how you value your time, hence the opportunity cost you are foregoing in this instance.
I agree that time outside of a job has value. Didn’t say it didn’t. But for most people it doesn’t have a monetary value.
To name a hypothetical amount of money to not spend time at home doesn’t mean that therefore it “cost” you that much money. There’s just no correlation. To say it cost you time is fine. To say it cost you ___ amount of money because that’s what I came up with in my hypothetical situation… it’s just not true. Saying it doesn’t make it that monetary value, forgoing to get paid that amount of money makes it a potential cost of monetary value.
I think you make some valid points but I’ll also have to disagree with you. Even in economics, opportunity cost does not simply refer to an actual loss of profit. It can be a benefit, it can be time, it can be a resource. Just because you don’t lose actual money doesn’t mean there is not opportunity cost. But I do agree that opportunity cost differs from person to person, so people shouldn’t argue that just because they suffered some loss you suffered the same loss
You’re allowed to disagree with me…
Once. Twice and you get banned!
(Just kidding no one has ever been banned. total joke).
I mean, yeah. Different people’s value has a lot to do with it. I poorly added a section on, okay, it is a helpful decision making in some cases. Time should be included.
But really the article if a rebuttal to using the phrase to show how travel isn’t “free”, in the context of how much money does it cost. Ya know what I mean? If you say, travel isn’t free because my time is worth ___, or I paid ____… that just doesn’t apply to most people.
So while everything cost time, that doesn’t mean that someone else’s time has a monetary value. And in that sense, it can’t be used as an “opportunity cost” proving that travel isn’t free.
Because the conversation is about money, which is why people add how much they paid. When someone says travel isn’t free because of opportunity costs, they don’t mean “you can spend your time with your family, or watching netflix, or walking the dog”. They mean, “this does end up costing you money”. Which, I try to argue, isn’t always true.
Exactly. 900,000 miles from the AA card required $90,000 in spending. Obviously it was still a good deal but no matter what method of MS used and no matter what the fees for generating the spend were (even if a profit was made MSing), there are still forgone rewards that could have otherwise been earned from that same amount of spending.
Pretend it is 3 months ago and Target still allowed free CC loads to redbird up to $5k per month. I get a new Ink card, go charge $5k at Target, get 55k UR points and book a FREE flight! Expect I also have the WF 5% card and Target is a grocery store. So I just missed out on $250 cash back to earn those UR points. Thats not an opportunity cost? I think this is the most common type of opportunity cost that I see mentioned when discussing miles/free travel.
Right. Just like the car example. They are forgone rewards. It’s not lost money unless you consider the other option of free money as lost money.
It’s kinda like a guy gives me a free car. Could I have sold it for $20,000? Yes. So did it COST me $20,000… no. Choosing one reward over another isn’t a cost… we’re still talking rewards which are free.
Regardless, I didn’t pay for the rewards.
Again, this is an opportunity forgone, but it is not a cost.
Like… So it’s not free because you could have gotten this other free thing?
I have 100k UR points. I could sell them for $1400 but I book a flight instead. Thats not opportunity cost. OK fine. But it is something – some other name or economic concept. Doesn’t matter much to me what someone wants to call it. But I have $1400 less in my bank account. The flight cost me $1400, even if I got the points for free. If I win a raffle and choose a car instead of $25k, well that means I have a car and I don’t have the cash. So in effect the car cost me $25k. Even though I didn’t have the money before, I could have it now. I traded $25k for the car. I’m sure you’re right thats its not opportunity cost. I guess foregone rewards like you said (and mostly semantics to me). Economic theory aside, the forgone rewards are something I need to consider in a real world decision making scenario.
Okay, I agree and disagree. I agree that it has real world/cash trade offs. Regardless of whether or not the car was free I would definitely take the $25,000. I wouldn’t pay $25k for a car, because I can’t afford it, and therefore I shouldn’t trade it off.
Regardless, even if you still say you traded the car for $25,000… the $25,000 or the car were free. Although you make a good point.
However, one big point is that not all travel rewards have a cash opportunity. (which you might not disagree about) Regardless of whether or not it’s opportunity costs or free, or whatever… that’s not all rewards programs.
If I get the AA card, the United card, the SPG card, the Hilton card, the IHG card, the Lufthansa card, the Alaska card, etc…
Those points don’t have a cash trade off.
And for some reason, because of that, some people will say that bank points aren’t free… even though it’s the same thing. And two, it completely ignores the fact that the majority of the opportunities in this game can’t be traded in for cash. My brg can’t be cashed. My Orbitz bucks can’t be cashed out. My IHG into the nights free nights can’t be cashed out. My airbnb credits. etc… etc… etc…
So it’s kind of cheap shot to say, “travel isn’t free because your bank points could have been redeemed for $400 instead”.
Minor disagreement:
You don’t have $1,400 less in your bank account. It was never in the bank account at all. :-p
“If I get the AA card, the United card, the SPG card, the Hilton card, the IHG card, the Lufthansa card, the Alaska card, etc…
Those points don’t have a cash trade off.”
What are you talking about? People sell these miles every day.
Well, I don’t play by that game and most of my readers don’t. Very small percentage are willing to risk their account forever. Just because you do it doesn’t mean that other people are willing to.
Which is fine.
Many people aren’t willing to flout T&C by msing either. But it is still taken into consideration in most peoples calculations.
The opportunity exists, whether or not people are willing to take it is up to them.
To your car winning example, the choice happens after you won the raffle. If you choose the car, the the opportunity cost is the motorcycle. But opportunity cost is NoT really an actual dollar amount or of a “cost” but rather the “Value” (motorcycle) you are giving up when taking the car.
I believe you are taking the word “cost” too literally.
No one talks like this in real life.
“Honey, I picked up a gallon of skim milk, it was only $3.”
“Not ONLY $3, it also cost you a gallon of whole milk that you passed up”.
*blinks*
But what I apparently don’t make clear is that I mean that the phrase is used poorly to prove things aren’t free. Ya know?
So just because there was a trade off, doesn’t mean that the price was free. That’s what I mean between a car and motorcycle. Yes, you have to choose. But it’s still free.
The optimal allocation of resources can be expressed by a production possibilities curve. One might choose to call operating below that curve an “opportunity cost”, but most people call it being normal, inefficient, lazy, or a little bit of each.
I haven’t read through all of the comments so this point may well have been made before. But top comment noted that time is a scarce resource. It is odd that you value time at zero. The fact that we can’t perfectly quantify time doesn’t mean it’s valueless. I’m a salaried employee which means I don’t get overtime. When I have to work really long hours sometimes, I’d prefer to be home, because that time has value. It’s not $0.00, as you say in the post.
But another way, if your free time is worth $0, then you should be working 24 hours a day (or maybe 16 if you place a non-zero value on sleep). You could get a job somewhere paying minimum wage, but a few bucks is more than zero, right? Of course you don’t do that, because your time isn’t really worth zero.
(Of course, maybe YOUR time is worth close to zero, because you have a ton of time and few mandatory obligations (rent, job, etc.). But very few people are nomads.)
Clearly you didn’t read the post. I didn’t say my time is worth $0. I said that many people can’t make money after work and when they spend that time, it’s not costing them money. That’s it, and that’s a fact for many people even if it’s not you.
It’s not that time doesn’t have a value, it’s that it’s not a monetary value. That’s what the post is about.
I think the part where I lose you is on spending – maybe it’s a limitation of my own experience.
I find spending to be limited resource.
I also compare options against what I’m currently doing not the null case of doing nothing.
I have a 2% cash back card all of my spending goes there. There is no conceivable way I’d use a card with no Rewards for my spend.
When I go for a new card bonus there is then a cost associated. My spending is not Unlimited so to meet the spending threshold of the new card bonus I must decrement my 2% cash back spending.
Therefore I am foregoing one reward for another and assigning a value to the bonus – I must feel it is with more than 2% cash back.
If I had Unlimited spending then I could understand there being no cost but this feels like there is a cost – I’m technically paying 2% more for everything than I was before to get this bonus.
I mean you make a good point in many ways. But I’d say this could be personal experience.
1) How much is a spend requirement? Maybe $3,000. So you’re not using a 2% cb? But do you have to?
I don’t MS with a 2% cb card… ever. I just don’t do it. I do 5% quite often.
But if I go to meet a spend requirement I might be able to do it without changing my regular routine. I won’t use it at the pharmacy but might also swing by a different place I wouldn’t normally go to.
The thing is, none of these things are exclusive. It’s not as limited as time and it doesn’t have the same trade off value.
2) I’d say you’re talking about spending indeed, but it’s the same concept as getting the AA card instead of a cashback or hilton card. Just because I’m choosing to get a different set of points, doesn’t mean that it’s actually costing me money. It really doesn’t cost me extra money to not get or use the other Citi card.
I feel that there’s a big difference between a foregone 2% cashback on spend that would’ve already been made, vs a foregone 2% cashback on manufactured spend. If people complete minimum spends by simply switching their cards out and using the new one to spend $3k on their typical everyday purchases, then to me that is definitely an opportunity cost of $60. However, if you maintain use of your typical everyday cards, and MS the $3k to complete the minimum spend, I don’t view that as an opportunity cost regardless if I *could’ve* used my 2% card or not. I didn’t, and that was never the goal of that MS in the first place. To me, the difference is whether something would’ve occurred without my choice in the matter (for which I’ll at least earn some kind of rewards, unless I’m completely uninformed), vs if I went out of my way to make it happen.
Okay, the more I think about it, the more I think you’re right.
It’s like in the scenario of a card with miles, instead of a 2% cashback (assuming someone has such a card), when switching out regular spend… that could be an actual example of opportunity cost. I’d be interested in consulting an economics expert on this. 😀
But it’s a very niche circumstance. Most people probably don’t even have a 2x cashback card. I only have one and I’ll be downgrading soon. I don’t think it applies most of the time but part of the article was insulting the poor use of the phrase. 😀
The other point of the article though is that it doesn’t make it unfree. Hence the car example. It’s still free rewards points. Some of us are just savvy enough to maximize to the point that all maximizings are passing up an opportunity.
How about this example: Every M-F, a guy walks 2 miles home from work from A to B, and along the way there’s an apple tree that he can eat from. One day, he finds a 1.5 mile route home that doesn’t pass by the apple tree. Is there an opportunity cost to the shorter walk? (I’d say yes)
Now what if the same guy walks 2 miles on his weekend from B to C to go into town? Completely different route, and comes nowhere near that apple tree. Does the simple fact that he walked 2 miles mean that there’s an opportunity cost because of the fact that he could’ve walked his 2 mile A-B route instead to get an apple? (I’d say no)
Assuming you only had a limited amount of them, didn’t it cost the person a credit inquiry? I choose which cards I want to apply for carefully because I know at some point I’ll have too many inquiries and I will start being declined. Applying for a card isn’t free. In this case my credit inquiries are my resources, and won’t using them for one card instead of another mean a lost opportunity if I max our my inquiries?
Or if I know I’m limited to only 4 personal Amex cards, doesn’t applying for 1 cost me one of those slots? In this case the 4 slots is my resource.
How much money does a hard inquiry cost you?
I think it’s quite a stretch to say it’s a limited “resource”, (and I spend 0 hours a year thinking hard inquiries) but they just don’t cost money. It’s not an opportunity “cost”.
The Amex 4 is a limited slot… but it’s still not a resource or a cost. Although it’s not very limited to me, I’m only at 2 cards right now and I can cancel my Surpass any day now. Keeping the cards is could be in some cases a lost opportunity but not a cost. Although, there are people that disagree on my Amex moves… it’s still not a monetary thing.
The conversation I’m trying to spur is do these things have to have a monetary cost?
Everything you are talking about has a cost. The cost might not be “paid” by the person whom incurred it (externalities) but most time it does.
The inquires for the Hilton cards will “cost” me the opportunity of the benefit of a SPG card I didn’t apply. The monetary value of the opportunuty cost is dependent on my credit profile. There is always a chance I get denied due to “too many inquires”.
The fact you might have to cancel the surpass card to obtain another Amex card clearly is displaying your choices of a new card over the surpass card. There got to be some “value” you are losing from closing of that card. That “value” is the opportunity cost.
RE: “The ‘cost’ part of ‘opportunity cost’ should be an actual cost. (Duh, right?)”
Um, no. Opportunity cost is by definition not an actual cost, it is the loss of potential gain from other alternatives when one alternative is chosen.
You don’t have to actually lose money, you just have to lose the potential to gain money. And that is certainly the case in the majority of your examples in your post.
Right, I know what opportunity cost means, and I know it doesn’t mean that you literally pay money. That quote is taken out of context and the very next sentence says exactly what you just explained. The next sentence is “When I buy stocks, I could have put that money in savings that would at least give a few percent. That is actual money, and the net profits aren’t free money”. Much of the post is deal with the definition and I go into more detail in many places.
What the quote is saying, is there should be some kind of monetary value. Getting the AA card and redeeming AA miles for a flight has no monetary cost to me.
So that was my actual example… then your definition is “you just have to lose the potential to gain money”. Which doesn’t even applied to that example being used there. I don’t indirectly lose my money by redeeming AA miles. Nor does it apply to any of the examples (much less “the majority of [my] examples”) because they don’t deal with money.
And even in the very few cases where cash back is forgone (which seems to be what people want to discuss), it doesn’t change the fact that the miles were free.
Yes, redeeming AA miles has no monetary cost, but it most certainly has an opportunity cost. You are giving up the opportunity to use those miles on something else.
You seem to be caught up on “cost” and “free” to only be associated with cash money.
I should have worded my last statement differently in my original comment. Replace “money” with “anything of value”.
Okay, I mean, that’s true.
You always have to choose between two things, given that resources are limited. That’s true.
The point of the article is that people take the core concept of choosing between two things and say therefore the miles aren’t free. Because you have to choose between AA miles and Hilton points (which is true) that no matter what you choose it isn’t free because you could have chosen the other one.
That’s the mind olympics I’m actually against, and people trying to say that it has an actually monetary cost! Like a guy here in the comments saying that you could sell the points on the blackmarket of miles. Like, lawd, how far do we stretch the point?
So I’m not against the idea that time isn’t a limited resource being used, I’m against the notion that it’s always a financial trade off… for all other people.
Drew, you write in your post that my time from 5pm to 9am is ZERO. It’s NOT ZERO to me (you may be different.) If I have the option of spending 1 hour with my wife or 1 hour MS’ing and make $80, then I am valuing my time with my wife greater than $80/hr. So the opportunity cost of my time is $80/hr. Now, granted my wife pays me $0 for the hour with her, but that’s a different story. I posted this today on my blog. Tell me what your numbers come out – http://milesperday.com/2015/07/what-is-your-time-worth/
-Vinh
Yea, I don’t have the option of making $80 an hour.
You’re missing the point. It’s not that you could make $80/hr, but that you could do something, that has non-zero value. MS-ing into the five and six figures takes time. I MS a few thousand a month at a couple of stores that are right near my home and office. The more I have to go out of the way, the more time I’m spending.
Put it this way: I have a great MS opportunity for you where you have to fill out these forms and mail them in. Each form takes 1-2 hours to fill out, and you get 5 Spirit miles for doing so. Would you do it? Of course not. There are time/value tradeoffs (and opportunity costs) even when there aren’t fixed, objective market values to the choices (as in the stocks/savings example)
Right, that’s a trade off, but not an economic/monetary trade off… which I address in the post and recapped in the beginning of the post.
Here’s my take (because everyone cares…):
I think people are using the term opportunity cost correctly, but then applying it incorrectly. There is an opportunity cost to earning (most) miles, whether it is cash back or a different award or whatever. This does not mean that the miles (travel) were not free. You still did not pay out of pocket (unless you are doing this wrong). To me that is still free. Whether you could have gotten something else is irrelevant.
Right. I’ll agree with that.
And it’s kind of what I mean to write. I’m not saying you don’t have to choose between two things…
Although, it’s not even always true. Sometimes it’s just not a limited resource. Like applying for cards, I don’t have to choose, I’ll just get them all.
But yes, sometimes the phrase is used in relation to two limited resources, and then they really stretch it to try to prove that there’s a monetary value involved.
“My time is worth X, and therefore travel isn’t free for you”, is what I’m against.
Entertaining back and forth with the debates on this topic, but my focus is on simply earning miles where I can to achieve travel goals at smaller costs, with some aspirational awards here or there. I’m not too hung up on whether it is accurate to call them free or not.
One could easily rack their brain into paralysis trying to pin down the oppty cost of every single decision down to the very last decimal. Hopefully it doesn’t rob people of the joy of actually travelling to these places. Whether it is truly free or greatly reduced cost, all sounds good to me…I’ll focus my energy towards bagging and enjoying that next trip 🙂
Carrie was laughing last night as I was answering comments in the Club lounge last night, and these business men come in and wait for this third guy to come.
The two guys waiting are spanish, but they all speak english when the third guy comes. It’s late and they close this business deal thinking the giant lounge would be empty.
They proceed to close this seemingly big contract. Non-disclosures and all.
When we finally leave they were still negotiating and reading the fine print.
Carrie turns and says, “these guys are probably closing a multi-million dollar contract and you’re next to them typing away, ‘no you can’t value AA miles like that!'” 😀
If I may humbly give my opinion … Drew is right. Instead of just talking about “opportunity cost”, let’s look at the definition as posted in wikipedia:
“In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the “cost” incurred by not enjoying the benefit that would be had by taking the second best choice available.[1] The New Oxford American Dictionary defines it as “the loss of potential gain from other alternatives when one alternative is chosen”. Opportunity cost is a key concept in economics, and has been described as expressing “the basic relationship between scarcity and choice”.[2] The notion of opportunity cost plays a crucial part in ensuring that scarce resources are used efficiently.[3] Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered opportunity costs.”
Trying to argue that there’s “opportunity cost” involved in the context of travel hacking is just stupid, really. I guess it’s a good discussion at the lunch table for economics professors maybe. (My undergraduate degree was in economics..for whatever that’s worth to anybody). But for those of us who work “in the real world”, we just roll our eyes and gripe about how much we have to spend for our kid’s college tuition so the professors can sit around and meditate over crap like this.
Most of the people I see who comment travel is NOT free, argue that it’s not free because of the time spent on manufactured spending, applying for credit cards, hard pulls, blah, blah, blah. If I have a way to manufacture spend (for no cost, i.e. AMEX cards with 1.5% c.b., for example) and earn enough points to take me from point A to point B, it’s “free”. Okay, so maybe I have to pay $5 for a BA Avios…. so what? To me, still “free”. In a court of law, it’s close enough for “free”. Argue all you want with me that it cost me time to unload the cards, but the bottom line is, absent the trivial $5 fee (or whatever it is I pay to go CLT-LGA), it’s still “free”.
If you want to keep arguing ad nauseum about how that’s still a “cost”, go ahead, but don’t complain when you find yourself having no friends.
I would indeed hearing from an economics expert. Would be interesting.
But either way, the article is saying that just because you can come up with a trade off 1) doesn’t make it an opportunity cost… it has to be a limit resource, which often I can still choose both things. Not always but often.
and 2) It doesn’t have a monetary cost. So even if you are trading AA miles for Hilton points (which I don’t think you are given that it’s not limited to either or in the long run), that’s still not cash.
My problem is when people stretch the example to include a monetary value when… it clearly doesn’t have one. Or it might not have one for everyone.
The problem this whole discussion has is that we are talking about two different categories of costs: accounting cost and economic cost.
Opportunity cost is applicable against the ‘next best’ available option for you as an individual when making the decision to spend or not spend $X or X amount of time generating points (bonus or MS changes the numbers, but not the principle). This calculation is your economic cost for choosing to spend that time or the monetary and time value of that money.
Where the confusion sets in is when anyone, you or the other bloggers you ridicule, confuse that economic cost with an accounting cost. So my problem with the basis for the article is that you are ridiculing others who may simply be using economic cost to talk about their choice of activities because your opinion is that economic cost is a poor calculation and they should only be using accounting costs. Except you laid it out in an article that demeans and appears to itself misunderstand what opportunity cost actually is for the sake of making your point.
Also, I have no problem with any blogger. Bloggers aren’t the only ones to say this, people say it in my own comments often.
That’s a good point, I am talking about economic cost. I try to make that clear.
I also try to make it clear that “opportunity cost” involves limited resources. I showed many examples of people get something free without having to choose from a limited resource. No misunderstanding needs to take place to make that point. A BRG that gives me a free night doesn’t cost me anything, regardless of accounting cost, economic cost, or opportunity cost. No reason to insult something I didn’t say.
I did however try to make the point that just because you can find an opportunity cost… it doesn’t make it not free.
And the entire point of the article is that many people say something along the lines of “travel isn’t free because of opportunity cost”.
My summary is that, 1) not all miles and points things are opportunity costs. and 2) even so it can still be free of economic costs, which is what the discussion is about.
Indeed, if there is not an either-or choice to be made, then there is no opportunity cost involved. The time involved may be so minimal a cost as to not be worth the calculation for you.
In terms of ‘limited resource’ though – do you still stand by the car/motorcycle analogy in the post? Because I’d like to elaborate on that, but don’t want to go off on a tangent if the point is mooted.
Stand by it? I mean, as I say in the post, it’s a parallel from the very few examples of where you actually have to choose between two things. So I didn’t say it’s not an opportunity cost (that example), but that it has no economic cost.
Which is to say, the BEST example someone can come up with is something that isn’t an economic cost, but it is choosing between two things.
I think most things have no opportunity cost, but that parallel could be.
I agree with Greg. Your analogy on the motorcycle vs car isn’t really an opportunity cost argument. NO ONE in their right mind would say there was an opportunity cost in the car if you chose the motorcycle.
I agree there also isn’t any opportunity cost in applying for one credit card over the other since both are “free.”
However, there is opportunity cost in MS. If I choose to MS on a miles card vs a cashback card, there is opportunity cost in the cashback I passed on. If I choose to go buy $2,000 of GC’s to convert to MO that takes me an hour, there is an opportunity cost on MY TIME. Time is a limited resource. For most of your readers who have full time jobs, the time at home with their family may be greater than the economic value of MS’ing for 1 hour.
Right, so this is where I feel the term economic cost isn’t working, and that’s why I wanted to try to illustrate where both you and the bloggers you critique are unclear.
This transaction as described (aside from tax cost, which I will leave aside) is ‘free’ from the perspective of accounting cost. Absolutely. But when you are preparing to make the decision, opportunity cost should be built into your calculation of the economic cost of each branch of the decision tree (leaving aside for the moment intangibles that Economics often ignores, and therefore as a field often completely misunderstands actual human behavior).
So first you quantify in a common denomination all of the values and costs (counting OUT any sunk costs, a piece often forgotten), then you compare your preferred branch against the best alternative branch.
So in your example, let’s say you have the choices (and only these, for simplicity of example):
1. Decline both the car and motorcycle (Value: $0)
2. Choose and keep the car (MSRP: $25000, your subjective value: $18000)
3. Choose and keep the motorcycle (MSRP: $15000, your subjective value: $30000)
You’ll note that the decision tree heavily depends on what valuation you choose for each branch, but from the start we can eliminate choice 1 as being dominated by the other two. From there, though, what looks like a positive economic value for you in choosing the motorcycle (net $30000 – $18000 = $12000 economic – not accounting – profit) would look like an economic cost to someone valuing these items at MSRP (net $15000 – $25000 = -$10000 economic profit). Yes, these are in fact much more subjective than one would expect, but the point is that each of you should be discounting the branch you choose by the amount of opportunity cost you forego by not selecting the best alternative option.
And again, Economics as a field really struggles to deal with human beings as we are, because of some grossly oversimplified base assumptions that underpin everything (though it’s starting to turn). But I find that opportunity cost and sunk cost and the proper accounting of them is actually one of the most useful concepts it has as you are forced to acknowledge the cost of the road not traveled.
I agree with your blog post!!
Good, you can stay! 😀
jk. Thanks for reading!
Drew,
Everyone’s time has value, but the values are different depending on the person.
If there are some $ on the ground a few feet in front you, How much does it have to be for you to bend over and pick it up? Penny, dime….., Jackson, $100,000….
Your valuation of time might not be the same another person.
I agree that valuation is different for everyone.
Not everyone has a monetary value for all their time. Just because you can come up with a hypothetical situation of how you could find money doesn’t mean that you should value your time at that hypothetical amount.
Yeh, I’ve got to agree with some of the other posters that you’re confusing monetary cost with opportunity cost. Going back to the spending examples, if I spend on an AA card to meet a bonus instead of a 2% cash back card (even if I don’t have one, I could which is a whole other discussion) there is an opportunity cost of 2% of what you spend. Now it may be totally worth it and since you’re a rational person, let’s just assume if it wasn’t you wouldn’t be doing it. And there isn’t a monetary cost but there is an opportunity cost since you gave something up. If I pay cash instead of using a card, there’s no monitory cost but there is an opportunity cost of whatever miles I value most. If I win a car and don’t sell it for whatever I can get, there’s no monitory cost but there is an opportunity cost. Just because there is an opportunity cost doesn’t mean it isn’t worth it, but it is there.
I’ve actually agreed with that example of switching out a 2% cash back card to meet a minimum spend.
However, it’s a very very specific example that should be used as proof that travel is never free or that there is always an opportunity cost.
Its a lot of “IF” statements. IF you just applied for a card with a big spend requirement. IF your spending is a limited resource. IF you have have a 2% cashback that you normally use. IF switch the 2% cashback card out for the miles card…
But that doesn’t apply to many cards, anyone who doesn’t have a 2% cashback card (most people), people who don’t have other methods of meeting minimum spends, and any other method of free travel (BRGs, bumps, etc…).
@david
I agree with you. The opportunity cost of me getting a new CC vs doing nothing (assuming I have nothing going on for 5 minutes on any random day) is $0. The spend associated with that is 2-4% CB, which the bonus will always beat (if you’re not an idiot). Would I rather have 100k aa miles or $200-400 from CB… yes the miles please. 25k AS miles and $25 profit vs $22cb? no brainer.
I was reading a thread debating netjets vs delta private jets and came across this quote “As the subjective cost of items/services is concerned, a good criterion is that any expense under 1/10000 of your net worth becomes irrelevant. Try it yourself.” This theory probably explains why you or most people in this game don’t care about a trivial $5.60.
I sometimes think, should I do 10k for the hilton night? (really 7.5k first year) I could have 1 night at any hilton in the world for an (arrival card) opportunity cost of $165 for travel. The thing is after year one thats $220+$95=$315. Sure would be a good use if I need a place in new york randomly (only the first year which I did for other reasons), but I’ll take the $315 (or soon to be $305, or $295 cash) and figure out other plans. Then throw in the benefit of getting the card again down the road, its a no brainer to me. If I stayed at hilton often or vacationed for months on end in egypt might be a different story :).
If you can make time for this hobby, your OC is 0$. If your time when you sit around on the couch and watch tv is worth $100+/hr, change hobbies and just pay retail for whatever you want, stop taking all the good award space.
“opportunity cost” does not apply when your alternative is doing [almost] nothing. Everyone can make 5-10 minutes every month to do this simple stuff. If you put $100/hr on your time at 10 minutes a month and have a net worth of $160k+ you should think about how irrelevant that $100/hr for 10 minutes on the couch was.
Only argument is credit pulls, but if your into this game deep enough should not be an issue unless you want to fly around the world every month (or more frequently I read some guy does in the rolling stone ;))
Cheers.
Looking forward to your next great post about how to earn, best way to use, etc. Actually, I would love to see a post for the middle step(s) of “I have x number of points/miles, now what?”
PLEASE don’t let some philosophical difference with another blogger or traveler get in the way of your awesome content.
I should clarify that this has nothing to do with another blogger. Period.
I’ll admit it to be something less likely to be posted than normal, but I’m taking the week off from writing to work on other projects as I said in entire post and alluded two in the last two posts. There’s no reason to think the website won’t talk about “best uses of miles” because I wrote about something a little different.
I don’t mean to sound as if I doubted you. I was maybe a bit too motherly. I just love your regular content and was trying to be supportive.
Hi Drew, I cancelled a $450 fare from PHL-GRU because I would need to use more vacation days than I’d like, and paying for hotel stays that’s not on points. I cancelled the fare because of its opportunity costs. 🙂
That is a great example of opportunity cost. Doesn’t mean it applies to everyone, and it doesn’t mean that yours isn’t valid. :-p
Bottom line – Your content is king. Trying to pin point Opportunity cost in this hobby is same as defining value to points/miles. Everyone does it differently to justify their approach.
That’s a good point.
I think everyone does do it differently, which is largely my point.
Some people do value their time highly and that’s a major opportunity cost, and some people don’t. All I’m saying is that people are different.
There’s a economist comedian who calls himself a “stand-up economist.” I think this joke (paraphrased by me) is relevant:
In economics, choices are bad. To illustrate, let’s say someone offers you a Snickers bar that you value at a $1. Now, your economic profit is $1. But if someone offers you a choice between a Snickers bar that you value at $1 and some M&Ms which you value at $0.70, then your economic profit will only be $0.30 (the $1 Snickers bar minus the $0.70 M&Ms which you gave up). You begin to see why choices are bad.
The worst possible situation is being offered a choice between a Snickers bar and an identical Snickers bar. You might think that this is no different than being given one Snickers bar, but that sort of sloppy thinking will never get you a tenure track position.
http://standupeconomist.com/
That is awesome. So funny.
So true. The more you think about economic rules, the more ridiculous it can feel. Something costing you an opportunity, as a form of decision making is what this all means. It’s kind of like what I commented about the skim milk vs whole milk. It didn’t cost you skim milk, but it in theory you did give it up.
Which is all to say, no one think like that in daily life. We think like that when investing and not snickers bars. And hopefully not miles. 😀
I agree. I hate how the term “opportunity cost” is constantly used in our hobby. If I would otherwise be sitting on the couch, watching TV, then it cost me nothing to MS. Geez.
There’s nothing like being lectured on economics by a professional freeloader who is a drain on society.
Drew, your blog is great and I think you’re one of the best out there doing it, but this was not your finest moment.
You belittle people for making an economic argument, but then go on to show that you don’t really understand the economics.
I agree that sometimes you do get truly free travel (for example taking a bump voucher and getting switched to a flight that gets you home faster and more conveniently), but the odds of accomplishing stuff like that consistently enough to travel around the world for free on a regular basis are very slight.
Your time is a cost. Period. It will differ with every person, but every person’s time has some value that can be expressed in terms of whatever monetary currency you operate in. Otherwise why would people be asked to be paid for work? Time is a cost, and it’s also a limited resource (unless you’ve discovered the fountain of youth during your travels). Just because you do things outside of work hours doesn’t mean that the time spent doing them isn’t worth anything. In fact, the value of your time spent at work helps determine the value of those hours you have outside work.
So yes, some travel can be free, but almost everything we do costs us something and therefore most of our travel will have some cost associated with it. And that’s not a silly or benign point. The more we understand this the more efficient we will be with our choices not only regarding travel but about everything in life.
You travel a lot and blog and try to make a living out of it. You love doing it and it shows. I think that’s F’ing awesome. But…. what if you decided to not travel and went to law/business school and went to work at Goldman Sachs making $500,000 a year with a great benefit package. Or say you did the same and ended up with a job making $100,000 or even $50,000 but you had health insurance, a 401k and a great retirement package. Even me sitting here right now typing this reply has a cost. We ignore that cost at our own peril.
One of the other bloggers (I apologize for not being able to find it cause I just saw it yesterday so it’s fresh in my mind) posted this: http://programs.clearerthinking.org/what_is_your_time_really_worth_to_you.html
So you can actually try to put that value on your time. There’s probably a bit of a error one way or the other, but it’ll give you a starting point.
Your my favorite blogger and I travel like you ( full time for 17 years ) not my favorite post but in the end we both travel the world for 24,000 a year -that’s the key
Drew, I love your blog and the resources. However, this just seems like a self-indulgent rant that could have been summarised in 1 sentence. The same goes for the previous post on “terrible math”. I get what you are saying and agree with you, especially The-Points-Guy-esque-value chat about “value” which is pretty absurd. “I got 150 cents to the mile because I got a $3,000,000 airplane suite for free.” I know you are busy this week with a special project but dont sink to this. Everyone already knows what you have taken so long to say today.
If everyone knows… then why do half of 70 comments seem to argue against the things I said. 😀
If we stretch things to the point of the unrealistic I think they become more clear. If someone offers you 1 million dollars but you must choose not to take the dollar that is laying on the floor, and you choose to take the dollar on the floor – have you not cost yourself the opportunity at a million dollars? Even though that dollar is still free and you could still feel good about it, you probably wouldn’t feel as good as if someone had just given you the dollar.
This doesn’t mean that the points we earn aren’t free, but it also doesn’t mean that there is no opportunity cost. I think it’s just semantics and the truth is things can be free and still have an opportunity cost.
There’s not need to stretch to such examples. This is a really clear example that is addressed in the post.
1) Trading for 1 million dollars is a monetary value. I specifically say that’s what I’m not talking about.
2) Bending over isn’t a limited resource, so that example isn’t an opportunity cost.
So I’m not sure what your arguing against.
All of a sudden everybody that took a Macro Econ course is an expert haha.
It was a required course. 😀
I would view “free” travel and opportunity cost as different concepts. If you get a 50K sign up bonus and spend it on two flights, the flights are free (ignoring any annual fee paid on the card). However, once you have the sign up bonus, you have an option of how to spend that free resource. In this example, you’re choosing to spend the miles on flights instead of redeeming for $500 in gift cards. The flights were free in that you paid nothing for them, but there was an “opportunity cost” in terms of choosing the flights vs gift cards.
As I said in the post, that is one of very few examples where you can choose money instead of points. One of the few economic opportunity costs.
However, I agree it’s still free.
Dave what the hell are you talking about? I have a graduate degree in economics and therefore feel qualified to comment about this.
And no matter what you think or say, the economic facts are what they are, what they always have been and will continue to be!
First of all, Thank you Drew for taking the time to respond. My comment is actually in regard to both of your posts (“terrible math” and “opportunity costs”, as the discussion in the comments of both articles goes in the same direction).
My point is not, that travel can not be free, because it obviously can. My point is, that most of the travel you say is free, just isn’t, because you didn’t take into account the value of the time you spend getting the points and researching and learning about this stuff. And everyone’s time has substantial value (even if it is outside of 9 to 5 and even if it is spent watching Netflix)! This is just an economic fact, as well as a fact of life. It blows my mind that this isn’t common sense and that anyone even bothers arguing for the contrary.
If you reject this argument, than following this logic, my salary in my day job would also be “free money” and any travel I buy from my salary would be free travel, which no one in their right mind could claim. If your point is, that some people (falsely) value their time at zero, then we are on the same page as far as this statement goes. But the fact remains, that any definition of “free” based on this flawed logic is flat out economic nonsense, plain and simple.
So, if you take into account the value of the time you spent and your travel is still free or even makes a profit; go ahead and say that travel was free. But most travel (probably including a lot of your travel) just is not free.
Hi Drew,
I like the idea of this. The only bit that I think isn’t exactly grounded is the following:
“The fact of the matter is, most people work 9 to 5 jobs. If they work past 5, they don’t get paid more money. Heck, in many cases they can’t work past 5!
Their time from 5pm to 9 am has a monetary value (remember that’s what we’re actually discussing here) of $0.00 (zero dollars and zero cents). Nada.”
I feel that this ignores other things they could do with their time ie education, for some people working overtime to get a promotion etc. or even activities such as cooking vs eating out which do have an economic impact. Even for something like education which has a zero direct impact on wages for example the difference should be something like the difference in net present value (NPV) of doing the extra activity vs NPV of your current job. The fact that you don’t know the exact value ahead of time doesn’t matter in terms of it having an impact.
In terms of immediate cash you are probably right but if someone only had time to gain a masters part time (to add to their future earnings) or engage in manufactured spend then it may be that the NPV of the masters is higher ie making it a more profitable project over the long term
For most of these decisions I use a metric of 50 AUD per hour but it slides up/down depending on:
– does it have a good external benefit? ie I get a walk by not taking a car
– is it repeatable? ie does the mental effort get easier
– is it likely to lead to higher future earnings ie putting in extra time at work
I definitely think of my extra time in dollar per hour terms and a certain amount of MS/using credit cards etc is worth it. One interesting conclusion would be that for careers where salaries cap out lower is that MS etc becomes relatively more profitable ie may be worth a lawyer that can charge 300 an hour not engaging in MS or optimising CC spend.
Paul
I wholeheartedly agree and you give some very interesting examples like education as a means to get a higher salary in the future and eating out vs cooking at home and stuff like that, which require time but have an immediate economic impact. I just don’t get how anyone can keep saying, that there are people whose time outside of work has a monetary value of 0…
I’ve been following travel and miles and points blogs for a couple years and have never commented until today. I am an economist. I have my masters in economics. You are 100% wrong with this assessment.
Opportunity cost applies to the next-best foregone alternative. Sitting and applying for a a CC has an opportunity cost (i.e., those 10 minutes could have been spent grabbing coffee). Every action and choice has an opportunity cost. The easiest way to measure opportunity cost isn’t necessarily monetary–it may be time, or any other resource. Choosing to eat lunch at my desk has an opportunity cost. Choosing to walk to work has an opportunity cost. Choosing to talk to a friend on the phone for 30 minutes has an opportunity cost.
On a unrelated note–you are my favorite travel blogger, by far, and I love the work you do. But you are wrong on your definition of opportunity cost.
First, I value your comment. Thank you.
Second, and it isn’t to be rude, but did you read the points at the top? Serious question, because my attempts to clarify that time is an opportunity cost didn’t work. Because you are saying that I said something I didn’t say. Time is an opportunity cost. That’s not my point.
If you were the first to say that I said that, I’d blame you, but your not… so I don’t think I was very good at explaining when things are opportunity costs, because I focused at one point on non-valid examples, and then switched focus to examples that don’t really have monetary/economic costs. And I think it must have been poorly written if it didn’t communicate that opportunity costs do exist outside of paying money.
I even put it at the top that there ARE many VALID examples but they address costs that aren’t cash value trade offs. I even say “a paycheck isn’t free… it costs time”.
Then I later explain that you can value time that you spend when you couldn’t have been working a your job, but that isn’t necessarily a cash value.
I didn’t say that time isn’t an opportunity cost. I agree x100. Time is a limited resource.
I’m saying that the examples I hear on a regular basis either 1) Aren’t opportunity costs, or 2) Aren’t proving that something isn’t free in terms of monetary/economic costs.
#1 is i.e; you can’t say that choosing AA miles over the Hilton card is an opportunity cost when you can still get the Hilton card (I just got my second, so I have both).
And the time part isn’t to say that it isn’t a cost of time, but that not everyone has the same economic value of time. Many people aren’t doing it instead of making money. So the cost is still time, but the monetary value of time is ambiguous.
So to sum up how I completely agree with you (and that the opportunity cost of time isn’t what I’m trying to talk about)… I’ll quote myself in the article:
“Can you “value” your time even if you wouldn’t be making money? Sure (but don’t get me started on “value”). Although my point is that anyone could have a free flight, hotel, or both. And the “free” part is totally about monetary costs.”
Then I later say this:
“just because that time is worth actual money to you, doesn’t mean it also therefore is to everyone else”
And in regards to me saying that I agree that time is an opportunity cost, but it isn’t what I’m discussing and I try to establish that when I say this: “They don’t say “it can be free of money but cost you time””… because the thing I’m arguing against is the idea that ALL your miles can be redeemed for cash. Which… they can’t. Doesn’t mean they don’t have value either.
I think your problem is you’re trying to say time doesn’t have a monetary/economic value, but it always does. I can almost guarantee that outside of dead people everyone has a non-zero $ value for their time. Just because someone thinks their time is worth $0 doesn’t actually mean that is true. If they sat down and really worked it out, they’d realize there is for sure a monetary/economic value to their time. The only question is how much? I think that’s what people are trying to get across to you.
Time is money.
Monetary value is defined as a value in currency that a person/business places on a resource, product or service. Your time is a resource. You may think you don’t place any value on it, but I guarantee you do. I will bet you a million dollars that you do. And so does everyone else. Therefore your time does indeed have a monetary/economic value, and when you trade it for some miles or cashback through MS, applications, etc, there is a cost associated with that.
I agree 100%.
Hi Drew–thanks for taking the time to respond. I must have misread your top comments. In case of monetary cost only (economists sometimes refer to this as ‘accounting cost’ as opposed to ‘economic cost’), you’re right, much of that travel is indeed free. Thanks for clarifying.
Drew, I’m a big fan of your blog and your posts in general, but this is my least favorite post by far. I agree with some of your ideas here, but to me, all you’ve really done is show that you don’t understand economics and that you don’t even know what economics IS.
Economics is NOT about money and only money. The words “economic” and “monetary” are NOT interchangeable, especially not in the contexts where you’ve interchanged them. “Economic opportunity cost” and “opportunity cost” are the same thing — there is no such thing as a non-economic opportunity cost.
There are others, but here are some of the specific comments of yours I am referring to:
1. “There are many examples of valid opportunity cost, but many of them don’t have ‘economic costs’, aka monetary value, aka it doesn’t cost you money.”
2. “Right, that’s a trade off, but not an economic/monetary trade off”
3. “My summary is that, 1) not all miles and points things are opportunity costs. and 2) even so it can still be free of economic costs, which is what the discussion is about.”
4. “So I didn’t say it’s not an opportunity cost (that example), but that it has no economic cost.”
Wrong, wrong, wrong, wrong, wrong. Non-monetary costs are still costs in economics. All trade offs, monetary or not, are economic trade offs. All opportunity costs, monetary or not, are economic. If you took an economics course and thought you learned that all non-monetary factors could be ignored, you should have gotten an F.
In a barter economy, where people directly trade goods and services without the use of money, is this not economics? What about the prisoner’s dilemma (and much of game theory in general)? Maybe John Nash wasn’t an economist after all. You should contact the Nobel Committee and have them rescind his Nobel Prize.
I wrote all of that off the top of my head, but I understand you might prefer some other resources.
From Wikipedia: “Economics is the social science that seeks to describe the factors which determine the production, distribution and consumption of goods and services.”
From the American Economic Association: “Economics is the study of how people choose to use resources. Resources include the time and talent people have available, the land, buildings, equipment, and other tools on hand, and the knowledge of how to combine them to create useful products and services.”
Notice that neither of these say “money” anywhere. We happen to use money to facilitate the distribution of goods and services, but money is not required for something to be part of the field of economics.
Further down in the Wikipedia article: “Opportunity costs are not restricted to monetary or financial costs but could be measured by the real cost of output forgone, leisure, or anything else that provides the alternative benefit (utility).”
From The Economist: “Opportunity Cost: The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits (UTILITY) that you did without because you bought (or did) that particular something and thus can no longer buy (or do) something else.”
In their following example, they suggested that one of the opportunity costs of training as a lawyer might be that you no longer have time to spend becoming better at football.
I understand you wrote this post because you’ve seen a lot of feedback that incorrectly uses the concept of opportunity cost to argue that certain things aren’t free, etc. I 100% believe you. But your post is not a good rebuttal.
“Wrong, wrong, wrong, wrong, wrong. Non-monetary costs are still costs in economics.”
I have said this so many times. Incredibly that quote me saying that right before you say that.
I say “There are many examples of valid opportunity cost, but many of them don’t have “economic costs”, or monetary value, aka it doesn’t cost you money.” Which is nearly the same thing. It’s saying, there ARE valid opportunity costs that aren’t money related. I realize now you may be confused because I say “economic costs” which is an economists way of saying gain/loss of money. But regardless, the meaning is exactly what you are saying. Non-money costs are still costs. “Economic costs” is a fancy way of saying money.
Breath.
>> I realize now you may be confused because I say “economic costs” which is an economists way of saying gain/loss of money.
No it is not. It is not an economist’s way of saying gain/loss of money — that was the entire point I was making. You’re using the term “economic” incorrectly, and you seem to believe “economic” means that something only relates to money. Correct me if I’m wrong about this, but you said “economic/monetary” an awful lot in your post and replies…
>>“Economic costs” is a fancy way of saying money.
It is not. You are using the term incorrectly. It’s not fancy; It’s wrong.
Sorry I did mis-speak on the second statement.
Sorry originally I did specifically say “monetary” costs. There are opportunity costs but none that involves monetary costs.
Or I’m saying that there aren’t economic costs that are monetary. Meaning at the end of the day economic costs are $0 and the accounting costs are still time.
But in regards to your wrong wrong wrong thing, “Non-monetary costs are still costs in economics”, I agree. And the statement you quoted specifically says monetary.
So going back to the original statement, I’m not sure what we disagree on.
I agree, that non monetary costs can be opportunity costs. THE POINT of the post (as I’ve stated over and over) is that saying things like, “Those AA miles aren’t free, because you could have gotten the hilton card” is 1) has zero monetary value, period. You can’t trade AA miles for dollars. and 2) it’s not an actual opportunity cost because they are not limited resources, proof being that I have both cards, even multiple of each.
Your original comment quotes over and over things I’ve not disagreed with. I am not saying “this isn’t an opportunity cost because time and non-monetary things don’t count as opportunity costs”. I didn’t say that, and I’m not trying to say that… but it seems to be what your very long comment is refuting.
I agree, but I don’t see what that has to do with the common example of AA miles vs hilton points.
All of my quotes of yours are cases where you use “economic” and “monetary” interchangeably as if they mean the same thing, when they absolutely do not.
You even did it again in your last reply, but I assume this was just a typo?
>> Meaning at the end of the day economic costs are $0 and the accounting costs are still time.
It’s the other way around — accounting cost would be $0, and economic cost would be time.
Anyway, why do I harp on this? Well, two reasons:
1. I had things to say about other points in the post, but there was no way to have a meaningful discussion if every time I said “economic,” it was interpreted to mean “monetary.”
2. The title of this post is about others using a phrase poorly, when the word “economic” and the phrase “economic costs” are used incorrectly all over the place.
I missed this post and the one about bad math, so I am late to the comment section.
Thank you, I can not tell you how many times I have said the same thing on both subjects.
Vizzini: But, but, opportunity costs.
Inigo Montoya: You keep using that phrase. I do not think it means what you think it means.
(I might have taken some liberties there)