Year two of the coronavirus pandemic brought with it a massive re-examination of personal priorities. The Great Resignation, more people moving from cities to suburbs and smaller towns, and the dramatic increase in funds directed toward sustainable investment strategies are just three examples of how people seem to be changing how they value trade-offs in their work, home, and financial lives.
All these examples involve money, but money isn’t the only factor. People are choosing jobs that are more fulfilling or provide more balance. They are moving to locales that offer more space, natural beauty, or quiet. They want their investments to make money and reflect their values. Everywhere you look, it seems that people are increasingly focused on maximizing not just their wealth, but their overall quality of life.
These trends illustrate something that I think is important, but often overlooked by financial professionals: Major financial decisions often involve both monetary and non-monetary trade-offs.
Economics Can be Emotional
For a moment, let’s go back to Economics 101 and the foundational concept of utility. In finance we think a lot about optimizing utility, but what is it? Utility is a measure of value, but it isn’t simply dollars and cents. Utility is defined as the total satisfaction that can be derived from consuming a good or service.
It’s tempting to take the mental shortcut of assuming more money = more satisfaction. After all, money is far simpler to measure than satisfaction. But maximizing utility is not the same as maximizing returns. Utility is subjective and comprises many factors. Ignoring emotional costs and benefits leads us to incorrectly evaluate the total utility of trade-offs.
You Couldn’t Pay Me Enough
When we evaluate trade-offs, we perform mental cost-benefit analyses. Which option has the highest value when all is said and done? Which will give us the greatest total return on our initial investment? Some of the costs and benefits we consider are financial. Some are emotional. Some are psychological.
I was once offered a position at a large company that would have meant a significant increase in pay, but the job would have required much more travel and the work wasn’…….
Source: https://www.morningstar.com/articles/1072226/the-value-of-nonmonetary-returns
