So my friends call me the cheapest person they know, but I also think like the author. If there is something I am going to use a lot and the added value helps me, then I'll shell out more for it. Really we're talking about Boots Theory[0]. If you buy cheap rubbish then you'll buy frequently. If you buy quality you may only have to buy once a lifetime, even if it is 3-5x. With your phone, if all you care about is texting and making calls, yeah, you're not getting any added value paying more. If you're a person that takes a lot of pictures and values the camera, you will get added value (don't come at me with the "buy a dedicated camera" because you're not carrying that in your pocket everywhere and thus can't capture the same moments).
So if you wear boots every day, it's better to shell out for the boots that will last you a lifetime rather than ones that will last you a season.
If all you care about is texting, making calls, playing the occasional game[1], browsing the web, doing mobile banking, listening to music, watching videos, using social media, responding to work emails, viewing the occasional PDF, word processed document or spreadsheet sent over email, screencasting to a TV, using the device as a mobile hotspot, testing software you write for phones ... and a few more less frequent things (Like using employers paging app, employers internal systems) ... then you don't get any additional value spending more than $400 on a phone.
Don't ask me what you can do with a phone that costs more, because I haven't yet seen anyone do something on their phone that my <$400 phone cannot do.
[1] Wordle, for example, is insanely popular right now.
And if you are bringing up games, wordle is an odd choice given that it's among the lightest popular games. My counter example is diablo immortal which just came out and I played some to check it out. I'm not convinced it would run well on your phone.
I used Wordle as an example of a game played by the masses. There are orders of magnitude more people who play things like Wordle than things like Diablo Immortal, hence my reason for using it as an example.
But still, gaming was poorly specified on my part; I should've mentioned that a $400 phone can play AAA titles, not that a $400 phone can play casual games.
Regarding the 525 dpi, you're correct, no $400 phone will have that. People who have trouble viewing a 300 dpi screen will have to pony up for a more expensive phone.
Where we've apparently landed is that $400 will let you play even AAA titles, but will not buy you 525 dpi.
I don't play AAA games and I need a camera good enough that I can read text I've taken a picture of with. I haven't spent over $200 on a phone in about 10 years (I think it was the NA version of the HTC One X).
The only real reason I’d consider upgrading is for the better camera on the newer phones. I think I paid $400-450 for that phone 2.5 years ago and just spent $125 on a screen and battery for a phone that will likely be great for another 1.5 years. Under $600 for 4 years seems pretty good.
While I was waiting on the screen to arrive, I bought a 2020 iPhone SE for $150. It’s perfectly usable and in some situations, I prefer the smaller form factor. (I hate the loss of FaceID.)
My wife’s 13 is better for sure, but only really noticeably in the camera.
I’m speaking as someone who has used both full time as well
For many people the cost of remaining in an iPhone-exclusive network may be worth the extra money, for others they don't have any opportunity cost to leaving the iPhone-exclusive network.
Anecdotally, I also thought that my iMessage contacts were worth the extra money, until I found out all the people in the network used whatsapp far more frequently.
Turned out, the important conversations weren't happening on iMessage anyway, which was a surprise to me at the time.
Boots theory is attractive because it's pretty obvious that more expensive products are nearly always better quality. But what actually matters is whether the increase in quality is greater than the increase in price, which I think is much less obvious.
There are plenty of answers to the question. But one approach is to make sure it looks as good and works as well for the return period, but doesn't last as long. E.g., you use less material, short the structure in favor of the surface, use lower-quality material, invest less in production quality, or offer shorter warranties.
For example, think of a raincoat. On one end of the spectrum we have the $0.99 disposable poncho, which is basically a garbage bag with a different cut. Up from there are all sorts of methods of improvement: https://www.rei.com/learn/expert-advice/rainwear.html
The better raincoats tend to be correlated with price because if a feature doesn't require additional expense, low-end manufacturers will just add it. And also because while many consumers aren't discerning about quality, many are, and will pay extra for it. Places like Wirecutter and Consumer Reports do the sort of testing that helps keep people honest.
That said, you're very right that there are many other things that influence price. A Burberry raincoat will be 10x the price of REI's favorite raincoats, but it won't last 10x as long. So Boots Theory, which is about good pairs of boots being more expensive than shoddy ones, is correct. But you can't work it the other way and claim that expensive things are always good in the way a night watchman thinks about his work boots.
While this is possible, I don't think that's really something you can go about with your life. Shit luck does happen. But you can keep your boots away from your dog.
You should acknowledge black swans, but you shouldn't plan your entire life around accounting for them.
So what's my probability of moving to a beach town and never needing boots again? Probably very low, since I will be unlikely to move and even if I did I would still use my boots for things like hiking, working around the house, etc. The risk is therefore very small as well. The same can be applied to your other scenarios. Uncertainty makes us uncomfortable, but it can often be reasonably quantified.
I have a pair of dress shoes that are approaching ten years old. I spent more than I ever had on any pair of shoes but they continue to be comfortable and are easy enough to resole, clean, etc.
There are enough items in the world of apparel (I hesitate to use the word "fashion") that are timeless, at least on the scale of a human lifetime. My belt is twenty years old. My watch (due for service) is over twenty years old.
A good shirt will last longer than a cheap shirt. If you buy carefully (i.e. not just what's in "fashion" that season), it can work for a long time.
I had a US-made dress shirt that lasted me close to 15 years and I think I spent less than $40 on it. It's a shame those mills are long gone because few shirts last that long and I'm not willing to find out if spending $400 on a shirt gets me the same quality.
At some point clothes become a Veblen good. The idea is to spend on quality, not on marketing or details that don't add to the durability of the item.
If my laptop, tablet, Garmin GPS or phone break, I am inconvenienced. As opposed to, completely dead in the water.
If that's all you care about, paying $400 like I do is silly - you can get it much cheaper.
The $400 phone I get takes fairly good photos (it's one of my main criteria in deciding on phones). Sure, if I want great photos, I'll have to pay more. I've decided that an extra $1100 over 3 years is not worth it for the marginal improvements in photo quality. But I know for some people it is, and that's fine.
Regarding the boots, we're both saying the same thing, which I think is not what the author is saying: You're fixing a time interval (e.g. 30 years), and calculating that it's cheaper to get the expensive boots vs the cumulative cost of cheap shoes in that time period.
When you fix the time interval (e.g. 30 years), comparing rates vs comparing absolute totals is equivalent.[3] What I typically see is that people take this equivalence and begin to compare against different time intervals (option X is for 2 years, option Y is for 5 years). This is what leads to so many silly blog posts saying you'll never get a better investment than your employer's ESPP benefit, because you get a huge return.[1][2]
In any case, the author isn't using the Boots Theory. He's looking at cost per use - and not utility/cost as a whole.
[1] https://thefinancebuff.com/employee-stock-purchase-plan-espp...
[2] I'm pro ESPP - but looking at those claimed return numbers is almost useless. It's trivial to make more money with, say, a mere 5% annualized return.
[3] When comparing investments, you also need the same input. It starts getting messy - which is why the standard advice is to convert to absolute dollars and compare.
It’s almost always the case that maxing out your ESPP contribution is a good idea instead of getting the money earlier and investing it in something else. It might even be worth getting a loan and still maxing out the contribution should you require more cashflow (because 10% loan is still cheaper than missing out on ~90% return). But the t return is limited to your max contribution percentage * your salary, therefore you still need to think about what to do with rest of your money.
How making more money in absolute terms in some other investment invalidate the above?
Look at the price for actual call options at these intervals and you will have an approximate idea of the value of this financial instrument. It’s probably substantial, almost certainly more so than the opportunity cost on your money (unless you must meet critical expenses or pay off credit card debt). And if you always sell the same day you buy, the risk is quite low (if the plan is at its bottom and the stock price falls 15%, basically, but most ESPP dates are just after earnings which limits the types of surprises you’re in for).
I completely agree. I did say I'm pro-ESPP.
The key point you miss is that the amount you can make is somewhat capped - and for many companies, the cap is 5% of your salary. It's almost always nice, free money, but most of the times it's a relatively small amount of money. It should not rank high in your whole investment scheme.
To take things to an absurd level, I can offer you a deal: You give me $1 (and cannot give more), and 6 months later I'll give you $10. That's a 9000% rate of return. Fantastic deal, right? But is it a big part of your investment strategy? I hope not.
> How making more money in absolute terms in some other investment invalidate the above?
It doesn't invalidate it. The trouble is when people focus on the rate of return more than the absolute amount, and decide to pick ESPP instead of investments that will make more money. When you look at absolute amounts, it's clear that ESPP, even though is good, is inferior.
If you do both, then it's not a problem.
Technically, you should think in probability weighted log-dollars to maximise your economy over the long term. (The Kelly criterion.)
In some cases this is equivalent to thinking in terms of fractions of your total wealth -- this is how the Kelly criterion is popularly presented.
For small ("everyday", as Bernoulli put it) amounts, this is equivalent to absolute dollars. So you're right, but it's a special case of a more general principle.
It makes only two assumptions:
- Growth compounds, and
- More is better.
Under those two assumptions, log-dollars is what you need to optimise.
By coincidence, logarithmic utility of money would also lead to the same conclusion, but that's mathematical happenstance, and not something going into the model.
----
Another way to put it: the Kelly criterion prescribes logarithmic utility. It says that to maximise growth (under above assumptions) you ought to adopt logarithmic utility. If you don't, you get worse results.
Another way to phrase it is that you reinvest your winnings.
* $/use isn’t really a rate in the way you’re describing with predatory financing. It’s not a cost hiding measure but one of many ways of estimating utility. Optimizing for price alone and not $/utility will bite you for lots of goods.
* A $400 phone used 100 times is $4/use and a $1000 phone used 100 times is $10/use so markets still have plenty of an effect.
E.g. I should start a new hobby because I am definitely going to keep at if for 5 years! And then you don't.
I have a budget of 500€ for sports per year. I use this on gyms, running shoes and what not.
I wanted to get into skiing so I bought some skis this year. It was about 700€.
Normally this doesn’t fit my budget. But I’m gonna keep these skis for at least 4 years.
Now the price is 175€/year. And I still have a bigger portion of my budget left for other sports.
Or SaaS.
It's essentially a reworking of the "Boots" theory or poverty. Cheap things will typically wear out faster and need to replaced often.
Like in your phone example. You actually based and compared them on rate. $1000/2yrs is worse than $400/3yrs. Hell, even $1000/3yrs is worse than $400/2yrs.
That $2.50/day computer is going to wind up being $2.50 * number of days owned when it is finally replaced. It will take 800 days to match the value if the computer costs $2000 initially. If you keep that computer longer than 2 years, 2 months, and 9 days, you're now paying more than the value of the computer.
I think the author's suggestion would be to just pay the $2000 up front. It's a lot of money right now, but if you keep the machine for 3 years, that's like $1.83 per day you paid for the computer.
An example of where looking at the cost per use makes sense is a gym membership. --If I consider the gym is worth, say, $5/visit and it costs $50/month, then I know I have to go at least 10 times a month to feel like I'm getting what I'm paying for.
On the other hand, yeah, my phone is not something that I'm going to try and figure out a cost per use, not the least because each use has a different intrinsic value to me (contacting someone is more valuable than checking the news, at least for me).
This is also dangerously close to going backwards about it. Figuring out how much you need to do something purely to "get your money's worth" out of it is the sunk cost fallacy!
It's better to start from how many times you want to go to the gym, multiply it with your desired cost per visit, and then see if this total exceeds the cost of the membership.
I know that's what you were suggesting, but the way you presented it seems to me, well, backwards!
Which you may or may not get close to.
It's easier with subscriptions generally. It's a good idea to constantly be reviewing how much you're using the subscription and how much value/benefit you're getting from it. And of course, that equation can change over time if the subscription fee goes up or you stop using something as much.
It depends on the opportunity cost. If you can get a house for 3600 a month, and the house appreciates in value in excess of the discount rate, then it's worth it to purchase that house.
To add to this, there is also the opportunity cost of buying the more expensive option because the difference is only $1/day. Spending $365/year on the more expensive option is missing out on getting some other item[1] for $365/year.
Like I keep telling people who ask me why I don't pay for $FOO instead of using $BAR (where $FOO is "Windows", or "Office365", or some development tool and $BAR is OpenOffice, Vim/Emacs, git from the cli, Linux, etc).
The answer to any "Well $FOO only costs you $10/m, and if you are a professional using it as part of your profession, then you should be able to afford it" is "I can afford lots of things, doesn't mean I am necessarily going to buy them".
[1] Sticking with the phone example, taking a phone that works out to be cheaper by $365/year means that you could spend the extra money for redundancy (if your phone breaks, simply buy a new one in 30m), you get a drawing tablet (suddenly, whiteboarding during zoom meetings saves 30m - what's your hourly rate?), or you put it into a index tracker or stock or debt, and get a positive return.
In this case, the absolute value analysis yields the same result, so it doesn't really "depend". I'm not saying you will always go wrong thinking in terms of rates. I'm saying you'll never go wrong thinking in terms of absolute values.
I think any introductory textbook on Managerial Economics would cover the same material. It's just that Engineering Economics books tend to use industrial plants and machinery for most of their examples.
This one[1] is probably decent (looking at its table of contents):
https://www.amazon.com/Engineering-Economic-Analysis-Donald-...
It's not a sophisticated topic. If you're a non-CS engineer who knows calculus and algebra well, this is one of the easiest topics in the curriculum.
Even if your calculus is poor, simply using the concepts with a spreadsheet will get you almost all the way.
My income is a rate so I find normalizing on time to be pretty useful. I think $/use is pretty similar to normalizing on time
Simple: $10K is greater than $8K. Analysis is complete.
Is 10% better than 8%? Not always. It depends on how much you put in and what the duration for those investments are. This is trivially true, yet so many people ignore this aspect.[1] People also get confused between simple and compound rates.
In a lot of real world investment situations, the inputs and timelines aren't the same. In real estate there are plenty of investments that require a minimum investment and have a fixed timeline (cannot withdraw in that time period). Quickly: Is a $50K investment at 8% compound rate over 7 years better than a $40K investment at 10% simple rate over 5 years?
There are also investment strategies that require periods of holding cash. It's not trivial to compare those with, say, an S&P 500 investment using only rates.
The standard taught in the engineering economics classes:
1. Fix your time interval to whatever is relevant for your situation.
2. Compute the cash you will have at the end of that time interval (i.e. absolute amount)
3. Go with the higher one.
[1] Yes - even in the absolute analysis, you should have the same timeline, and technically it's equivalent to a rate comparison in that sense. But I've found that when people do the absolute analysis, they never seem to forget to account for the timelines being the same.
Either you aren't using your phone much or you are needlessly suffering with inferior product. Wearing cheap shoes for years when you could afford comfortable high quality shoes is not a virtue. Same goes with tools we use.
>I honestly can't imagine what usable benefit a $1,000 phone would provide.
unless you never leave your house you lack imagination pretty hard. how about just having 5G speeds for internet? what about actually quality camera? how about any of the millions of interactions a modern smartphone allows? yeah you (probably) can do most of thaty shit with old phone, but you thats like using 6 year old computer
I have not. What has happened? Have SUVs stopped being the most popular class of passenger cars being sold?
This isn't passing the smell test. Do you have examples of it happening?
Any idea what they are replacing them with? Diesel's are pretty fuel-efficient after all, compared to petrol.
But if you're comparing using a computer for 5 years vs eating cheeseburgers over 10 years, using rates become more challenging, and is prone to faulty analyses.
My point, though, is that cost per use is not usually a helpful metric.
I think it can be: say you're comparing two cars with the same fuel efficiency, one's more expensive and more luxurious (or to make the same efficiency less contrived, you're considering the 'luxury interior package' upgrade) - roughly how many times (or hours) will you use the car over your ownership; it might be helpful to consider the per use (or hour) cost of that extra comfort.
Or (as a hobbyist/DIYer) a fancier tool vs. Draper/Silverline/Amtech/unnamed clones that'll get it done but won't last nor make you feel warm and fuzzy while using them. How many times will you actually need a ⅑" tartan paint brush with 90deg handle? Maybe it's quite expensive to get the better one that will last for the one time you'll use it. (I'm not very good at that one - know I'd hate myself the second time used it.)
You can get away with this because you are fixing the time interval: You'll presumably drive both cars the same amount, for the same number of hours. Hence a total amount vs per use (or per hour or per year) gives the same result. What the author is doing is comparing per use cost for very different entities, with unclear timelines.
Ask a random person: Is it better to use your phone for 2 cents, or eat an $8 McDonald's meal?[1] Putting aside that both serve very different needs, the question is missing the component: Over what time frame? The phone will die one day, but I'll always have the option to eat McDonald's.
[1] I have no idea where he lives where a McDonald's meal is over $14...
An example I've often used before is a Netflix subscription - I wouldn't pay much more for it, but a lot of things look like a bad deal/much lower utility in comparison to it. Pint of beer = half a month's Netflix, for example. It's not helpful, it's a recipe for overpaying for some things and unnecessarily depriving yourself of others.
Always think in absolute dollars and not in rates. $1000 is $1000 whether the cost per use is pennies or tens of dollars. Thinking in terms of rates is how people would fall for predatory installment purchases in the old days (you can have a new computer for just $2.5 a day!)
The other obvious problem is looking at cost absent of a market. It's not just how much it is worth it to you, but what the competition is offering it for. I personally pay less than $400 a phone and keep it for over three years. Paying $1000 for a phone just two years is not an improvement.
Edit: I spoke very dogmatically above. Using rates can be OK in certain situations where the analysis becomes equivalent to using absolutes, but it's not at all rare for rate analysis and absolute analysis to differ, and people make the mistake of using rates there. You will never, ever, go wrong by looking at absolute amounts, though - and it's usually the easier way to analyze.
In my engineering undergrad, Engineering Economics was a required course. I remember a fellow student said "I often return other engineering textbooks to get some cash, but this book is more useful than most of my engineering ones." Decades later, I can say he was definitely right. All too often I see engineers making poor financial decisions based on heuristics when they're quite capable in doing the (simple) math. But a lifetime of being exposed to flawed ways of thinking of money provides a convenient shortcut.