Big decisions are just small decisions on a larger scale. Quite literally. And, I have a thought problem to prove it.
Suppose at your favorite coffee shop is a little more than 15 minutes from your home in your favorite espresso drink with biscotti cost $5. It’s a good cup of coffee at a fair price.
Now suppose that another equally good coffee shop opens up only a minute or so from your home in the same espresso drink was biscotti cost $10. It’s twice the price of the other shop. So here’s the key question: Do you travel 15 minutes to purchase the $5 coffee or spend $10 on coffee at a shop very near home?
In scenarios like this most people report being willing to still travel 15 minutes to get the cheaper coffee. The difference between spending $5 and $10 seems pretty large.
Now let me change the thought problem suppose that you want to purchase a jacket it’s available at a nearby store for $100 but you can also travel to a store 15 minutes away to get the same jacket for $95. What do you do? Most people would rather buy the jacket at the nearby store saving time rather than money.
Finally let me change the scenario a 3rd time you are in the market for a television that cost $1000 at a nearby store. You can drive 15 minutes farther to a second store and get the same television for $995 with all other factors equivalent. What do you do? This third thought problem seems easy: we buy the television at the nearby store.
Why would we want to travel somewhere to save such an insignificant amount? All three problems contain the same simple trade-off: spend 15 minutes more time to save five dollars.
If that seems reasonable for coffee it should seem reasonable for a jocular television set, but we give up time for money when buying coffee and we give up money for time when buying a television.
What could explain this inconsistency? It’s not exactly a rational trade-off between time and money, and in a clever study researchers actually calculated how time and money do trade-offs when people go to fast food restaurants.
They measured how far people are willing to travel to go to those restaurants, they timed how long people waited in line in the restaurant drive-through’s and they examined the prices people are willing to pay at different chains and locations.
The results of their analyses are frankly astonishing. Each additional second of average waiting time the drive through line is worth about four cents to the average consumer. So if a fast food restaurant takes one minute longer than its peers to serve its customers it needs to be about two dollars cheaper in price to be competitive.
Time is more money
So, one minute waiting is equal to two dollars. Time is extraordinarily valuable to these fast food customers. In fact it’s much more valuable than it should be. If one minutes wait translates int two dollars in price that corresponds to $120 per hour.
That’s about seven times that of the average wage in the area studied.
Even the time driving to the restaurant was very valuable it was a bit less than 1/3 is valuable time waiting at the restaurant, but that’s still a rate much much higher than the wages of most fast food shoppers. There’s a paradox hidden here that I want to uncover.
The thought problem suggested that money is more important than time for small purchases. People should be willing to trade off substantial travel time to save five dollars on lunch as confirmed by both experimental data and by the fact that restaurants advertise sales and special deal so heavily.
But the analysis of real-world fast food shoppers suggest that those shoppers actually treat time is much more valuable than money. Each minute’s worth two dollars.
The range effect
The solution to this paradox isn’t found in standard economic models or current research and marketing. Instead it actually comes from a very old idea in psychology, something tied closely to a basic property of brain function. Let me give this old idea name and form. It’s called range affect, the range of some quantity is given by the span of its potential values.