On Transaction Utility or the Benefits of Feeling Like You Got a Good Deal
Let’s take a hypothetical example. Imagine that there’s a hotel that retails for $500 a night. Alternatively, you can pay 15k points a night to cover the cost. These points are flexible points and could otherwise be redeemed at a minimum value of 1 cent per point as a statement credit. Now, let’s also say that you know that–ignoring the possibility of using points, reference prices, and everything else–you would only pay $100 per night for this hotel. Since you only “value” a night at the hotel at $100, you clearly would not pay $500 per night in cash, but should you pay 15k points per night?
The seemingly obvious answer is no, you should not, because those 15k points are otherwise worth $150, and $150 is greater than your $100 willingness to pay. But I’d argue that it’s not quite so straightforward, and this is partly due to the utility or benefit your derive from making the transaction itself. You can derive utility (i.e. or become better off) from feeling like you are getting a good deal, and this makes the utility calculation much fuzzier.
From a “rational” standpoint, you shouldn’t use 15k points because that would make you strictly less well off in monetary wealth (i.e. you are paying $150 for something you only value at $100). But paying points could make you feel great (e.g. “I’m such a good travel hacker! I’m so smart! I was able to get a $500 per night hotel room for only 15k points!”), and this could be worth the $50 that you’re “giving up” by using points. From that $50, you could get a story that you’ll repeatedly tell others (e.g. through blogging, watercooler chats, humblebragging), you could improve your self-image (e.g. thinking that you’re really good at travel), or you could just feel good that you got something at a discount. All of these are perfectly valid things/feelings to derive utility from, and it’s up to the individual to figure out how much he/she values these feelings.
In the past, I’ve gotten annoyed when people claim things like, “I got 20 cents per mile for this redemption!” when their monetary valuation of the redemption is probably closer to 2 cents per mile, but if thinking that they got 20 cents per mile of value vastly increases their transaction utility, then who am I to judge? Provided that people are conscious that this is one of the tradeoffs they’re making, it’s entirely possible that paying the 15k points for a $500 hotel room that they only value at $100 is the utility-maximizing decision.
I understand your logic and mostly agree with you. However, I do think that the value of the points in your case may exceed the $150 price point. For example, I recently went to Santa Barbara for 2-nights using 30K UR (Hyatt Points) staying at the Hyatt Santa Barbara. I would never pay more than $150 to stay at that property. However, I went on a holiday weekend when rates at that hotel were $450+ plus taxes and almost every other hotel was just as expensive. In my case, I very much wanted to go that weekend and I would have paid the revenue rate if required, so I got around 3.3 CPM out of the UR points. This was a great value redemption to me. Travel prices are sometimes unpredictable and usually very high during peak periods. This is when points become truly valuable.
Well said!
Of course, one could argue that if people are conscious that they’re making the tradeoff, they’ll (rightfully) no longer think they’re getting such a great deal, sapping it of those intangible utility benefits. Once again, ignorance really is bliss.
And then, in a wider sense, the whole point of most coupons for 20 cents off $1 advertised as 20% off, “discounts” off of “retail prices” no one ever pays, etc. is to inculcate that feeling in people. Another utility-producing crevice of the brain cruelly drilled into and exploited by capitalism!