The Importance of Understanding Your Utility Function

When I write about efficiency, I often use the term “utility“, which can be thought of as a representation of your preferences or what makes you happier. And a large part of using miles and points wisely or conducting your life efficiently requires that you understand your utility function, which means that you understand what you truly prefer. This can be a lot harder than it actually sounds.

I’ve ranted before about travel bloggers who equate the cash price of an airline ticket with its value, and that’s largely because using the cash price of an airline ticket as a proxy for its value doesn’t accurately capture your preferences. Most people who use miles would derive more utility from having the cash price of a first class ticket in their bank account than having the miles price of a first class ticket in their mileage account, so it’s wrong to say that those miles were worth x cents a piece.

Unfortunately, since it’s often rather hard to know what your preferences are, people default to using other proxies to say what’s more valuable, like the cash price of things or what other people do or say. When this happens, people can be prone to making decisions that don’t actually maximize their utility because they use external proxies for preferences rather than their own internal metrics. For example, someone can be blinded by the high cash price of a first class ticket and use his miles to book a single trip in first class while in reality, he would have been better served booking two coach tickets and visiting two different places on separate occasions. It’s important to ask yourself in these situations: given the constraints of mileage balances and time to travel and cash on hand, would you prefer to travel in first class on one trip or use your miles to travel in coach on two trips?

A real-life example: I have a coworker who takes an Ambien on any long-haul flight to knock himself out. While the cash price of a first class ticket is prohibitive and the mileage price is not, paying for a premium cabin doesn’t matter for him since he’s not conscious to enjoy it. In this case, he has no real preference for first class over coach, so it doesn’t make sense for him to redeem for first class. He understands his utility function and acts accordingly by redeeming for coach, even if he has enough miles to redeem for the nicer experience.

I’ll write some more posts in the future about common pitfalls in understanding your utility function, but for now, I just suggest that you take some time to think about what really makes you happy. This is a good exercise in all aspects of life, but understanding what you truly value can help you use your miles and points much more efficiently in the future.