Utility Curves at a Glance

Would it mean more to someone to get a payrise from $15,000 a year to $20,000, or from $100,000 a year to $105,000?

You almost certainly preferred the first option above, for a very simple reason: the utlity or value of $5,000 is not constant across every situation, or for every person. Things have different utility based on (for example) how common they are, what they can be used for, and when they are being received.

Different types of utility curves include:

  • Diminishing Returns — Money may mean less and less to you personally, the more you have of it.
  • Accelerating Returns — The more money you have, the more you have spare to invest, allowing you to further increase your wealth faster.
  • Parabolic — Too little free time will burn you out, while too much free time bores you… You may want a happy medium in between.
  • Threshold / Cutoff — if you can’t get at least 30 days off from work to go on your dream mountaineering trip in the Himalayas, you’d rather just work now and do it later. 15 days of vacation time might mean very little too you, if anything.

There are essentially infinitely many types of utility curves (as there are essentially infinitely many types of curve in mathematics!), but let’s not overcomplicate things right now.

What matters is that you keep this concept in mind, and identify when its application is critical to your next negotiation. The “trade-off” rate or conversion between two or more factors at hand is not always constant, and the difference between a “Poor” and “Decent” outcome may be miles more important — or less important! — than the difference between “Decent” and “High”. Make sure these phenomena are factored into your decision making.

2018-11-05T19:42:21+00:00 Tags: , |
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