When you think about the economic transactions the image that probably comes to mind is a consumer purchase, perhaps buying a new car some running shoes or a new television. But not all economic transactions involve physical goods.
Paying for the experience
In all those cases the economic transaction involves giving up some of your money for a physical consumer good. But not all economic transactions involve physical goods. When you go to dinner at a nice restaurant what are you paying for? It’s not the calories in the food you can obtain food of similar greater nutritional value for much much cheaper.
You’re paying for the experience: the ambience of the dining room, the attentive service, the opportunity to have a good conversation with someone close to you, and yes, the taste of the food. When you think about it paying for experiences seems a little odd, experiences exist for a fleeting moment and then they are gone, but people are willing to pay enormous amounts of money for seemingly simple experiences.
Probably an overestimate for most people
If you’ve ever stayed in a beachfront hotel, you know that rooms with a view of the ocean cost much more than non-ocean view rooms. How much more depends on the hotel and the view. In many cases though a true oceanfront room one with the best view will cost between 10% and 25% more an identical room that doesn’t face the ocean. Is that worth it? Let’s do some math. Let’s suppose that the difference in price between Ocean view and non-ocean view rooms is $50 a night.
For some hotels it will be less and for others it will be much more and let’s further suppose that you spend 30 minutes each day just sitting in your hotel room and admiring the view. That’s probably an overestimate for most people. Together these numbers imply that looking out of the ocean from your hotel room is an activity worth approximately $100 per hour. That’s a pretty high rate of paper a simple experience, probably much more than for any other activity on your vacation.
It seems simply irrational
This ocean view premium extends to housing purchases as well. Again the exact numbers will vary somewhat depending upon the location but in general ocean view properties carry a premium of something like 30 – 40% on average, compared to nearby similar properties. For many beachfront locations that means that the house on the ocean side of the street would cost hundreds of thousands of dollars more than its neighbor across the street, even if they had similar amenities and even similar beach access.
It seems simply irrational in any sense of that word to spend substantial amounts of money on a fleeting insubstantial experience. You close your eyes and the ocean view disappears. Rather than staying a week in the ocean view suite you could’ve stayed in the garden view suite across the hallway and saved enough money to buy that new computer or the new television or save even more for your retirement.
Experiences are a little harder to define
But people are willing to spend impressive amounts of money on experiences. If anything there is generally higher demand for ocean view real estate than non-ocean view even after accounting for the difference in price. In today’s lecture all explore the idea of purchasing an experience and I’ll argue for something that may seem irrational: I’ll argue that experiences are undervalued, they aren’t as fleeting as they seem and we are often better off spending money on those experiences than we are on material goods. So let’s begin by defining material goods and experiences.
Material goods, are obvious, their computers furniture close cars books and houses. They are things that exist in our physical world we can trade them to others. We can save them for later in some cases indefinitely. Experiences are a little harder to define. For today’s lecture all defined experiences as the perceptions emotions and memories evoked by some event. An experience is what you feel when you look out an ocean view window or listen to a concert or step into the cold water of a mountain stream.
Material elements and experiential elements
Experiences are internal to each of us and thus we can’t trade them to others, we can’t save them for later. Now I’ll talk today as if these are two distinct categories: material goods on the one hand and experiences on the other, but they are completely distinct. Many material goods can also convey experiences: cars, clothes and houses all carry value, both because of their physical nature and because of the experiences they enable. We don’t just purchase a down winter coat because it protects us from the elements, we also value his comfort in the style of presents to others.
Food purchases have material elements and experiential elements: we purchase food to survive, but we usually choose one specific food over another because of the experiences it provides. And our modern digital world can completely blur any lines between material goods and experiences: when we purchase additional copy of a popular book is that book material or experiential? there’s no physical book in any sense but the book will last for an extended period of time and can be moved around.
Happiness doesn’t always come for material possessions
So think about material goods and experiences as two extremes on a continuum, and it is helpful to think of one feature that distinguishes them then think about time. Material goods last, experiences are fleeting. It’s been long recognized that experiences are valuable. In 1751 the Scottish philosopher David Hume ended his inquiry concerning the Principles of morals with the meditation on this very issue.
He valued experiences, what he called “the unboxed satisfaction of conversation, society, study even health and the common beauties of nature, but above all the peaceful reflection on one’s own conduct”, but he disparage material goods what he called “worthless toys and gewgaws… the feverish empty amusements of luxury and expense”. Since the time of Hume, psychologists, economists and even grandparents have recognized that happiness doesn’t always come for material possessions.