Money

I was having dinner last week with Tim, a friend I've known for years here in Sydney. He's, among other things, an academic, and also has a private practice on the side. The university he works for had offered him a lump sum one-off payment to retire. He had more or less decided whether to take this offer, but wanted to run the whole thing by me. People have a naive faith in my ability to work magic with money and numbers (not surprising, I guess, given my background and my job), but once in a while I do get to show off, and I do enjoy the fun of bludgeoning a problem with some hard-nosed analysis.

After a bit of prompting, we figured out that his overall income would be much the same . He'd just be getting all his income from private practice. But he said he liked having two jobs instead of one, there was a benefit to him in diversification, and not really in any monetary sense. "So how much is it worth to you to have two jobs?", I asked him. He shifted a bit uneasily and said it was impossible to put a monetary value on it. My response, of course was to say that I can put a monetary value on anything. Next step was to divide the one-off payment by the rest of his working life to arrive at a figure per year. Let's call it X thousand dollars a year.

I looked at the beers we were drinking, and reminded him that he'd just entered into a transaction in which he'd expressed a preference. Given the choice between $4.25 and a bottle of beer, he'd chosen the bottle of beer. People sometimes forget this.

So I asked him to choose, in the same spirit, between X thousand dollars a year and this job diversity he likes. Which would he prefer? He unhesitatingly said the diversity. So that's the answer, the lump sum's not enough. I then said if we were really ambitious he could work out the amount of money per year where he's indifferent between the two and from that we could back out the lump sum that would be required, but we were getting bored with the topic by then.