‘Suppose you bought a case of claret a few years ago for £20 a bottle. It now sells at auction for about £75. You have decided to drink a bottle. Which of the following best captures your feeling of the cost to you of drinking the bottle?
1. £0. I already paid for it.
2. £20 — what I paid for it.
3. £20 plus interest.
4. £75, what I could get if I sold the bottle.
5. -£55. I get to drink a bottle that is worth £75 that I only paid £20 for, so I save money by drinking it.’
This question (with prices in dollars) was given to readers of Liquid Assets, an annual newsletter on wine auction pricing. It was posed by Richard Thaler, later to win the Nobel Prize in Economics. The proportion choosing each answer was:
To an economist, there is but one correct answer to this question: by drinking a bottle of wine which could be sold for £75 you are sacrificing £75 of utility which could be used for something else. In economics, in ascending order of wrongness, the answers would be 4 (the ‘right’ answer) followed by 3, 2, 1 and 5. On the other hand, as any hedonist will have noticed, the more you think like an economist, the less you will enjoy drinking the wine.
In truth, whether something feels expensive is only tangentially connected to what you really pay for it. I once persuaded someone to get Sky television by pointing out that they spent £2 a day on newspapers. ‘So what?’ they said. ‘Well, if a newspaper is worth £1, then 80p a day isn’t much to pay for 200 extra channels.’ I have even played the same mind-trick on myself: I no longer feel guilty buying expensive tea since I calculated that exotic tea made with tap water costs far less per pint than bottled water.
The only useful rule I can offer from my long years of consumerism is that you should upweight the value of those extravagances which you can enjoy with a great deal of frequency. Beds and bedding are one category where it makes sense to pay over the odds. I’m not into gardening, golf or horses, since observation of the practitioners suggests it would be cheaper and more convenient to be addicted to crack, but I do understand such hobbies deliver protracted enjoyment that most things don’t. A leading academic authority on happiness even justified his Rolex on this basis: ‘Divided by the number of times I look at it, it really isn’t that expensive.’
A useful concept to use here is the idea of ‘cost per entertainment hour’ or CpEH. This was first formulated in the computer games industry to explain why often impoverished computer gaming enthusiasts pay opera-ticket prices for a single game. Quite simply, looked at through the lens of time (a game might entertain you for hundreds of hours), this was cheap entertainment.
Using this formula, the single best piece of technology I have bought in the past year (and, at £300, not egregiously expensive) was a 32 inch 4K ‘Ultra High Definition’ computer monitor. The freedom to have three windows of large, highly legible text all open at once, while watching TV on a fourth, is life-changing.
Yet when I told my friends about this, they looked at me as though I were mad. No one buys large computer screens any more. I have no idea why this is. The strangest thing about the past 20 years is that we have access to an unimaginable abundance of entertainment and information, and yet we seem happy to consume it on tiny little devices. Why?
Rory Sutherland is vice-chairman of Ogilvy UK.