The Qualitative Side of Personal Finance

The Qualitative Side of Personal Finance

Many disciples of personal finance fall stray into the trap of numbers. When planning out the cheapest path for a purchase or adventure, many tend to dwell on the numbers alone. And as a result, come to a conclusion, based off the numbers alone. There is a qualitative side of personal finance.

What they fail to consider is that there are many other reasons that should be factored in when planning, and not just numbers.

Flying to Tokyo

If you’re planning on taking a trip from New York to Tokyo, any fool on Priceline.com can see that the 72-hour trip with 23 layovers for $100 is the best option. Given that information though, that should be the foundation on which you build upon your decisions.

This is the quantitative base of decision making.

The other side of the coin is the qualitative base.

Or what I like to preach as:

The Utility Function

What is each person’s Utility Function in this trip?

utility function
Generic Utility Curve from Econ

The Utility Function is how much something is worth to each person. Basically how much one thing brings satisfaction to that particular person. And this is why it’s variable amongst each individual. A person may be willing to get an apartment in the center of the city. Its rent would be ridiculously high, but that person’s utility might offset the high rent. Maybe the person is a vegan and the apartment is located next to a quaint little vegan restaurant. Maybe it’s a 5 minute walk from work. Perhaps it’s located next to a Globo Gym and this person just happens to have a pre-existing membership with them.

Using the Priceline example above, it’s obvious that very few people would want to purchase that flight, despite it being the cheapest option available. While the quantitative base is more fixed ($100), the qualitative base is variable and depends on each person. There may be a few people out there, possibly unemployed, have all the time in the world, and be willing to go on that flight.

At the same time, very few people would pay $20,000 to get to Tokyo in an hour due to the high quantitative costs. Statistically, most everyone else would prefer a flight that will get them from NY to Tokyo within a day or two. They would be willing to pay a reasonable amount for it, much more than $100 and much less than $20,000. And this is where a person’s utility function offsets the quantitative base of the trip.

Don’t Forget The Qualitative Base

I see people making many personal finance decisions in real life all the time, only accounting for the numbers and disregarding utility.

  • where to eat
  • which theater to visit
  • renting an apartment
  • buying a car

In financial planning, remember to include all the variables in the decision making process.

 

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