# Units of Exchange

**Epistemic status:** Established and confirmed

*The lessons taught in Units of Exchange are straightforward applications of extremely well-established principles from economics and sociology, such as supply and demand, Pareto curves, value of information, the sunk cost fallacy, and arbitrage. The causal relationships underlying by each of these principles have been robustly confirmed in a wide variety of domains, and the recommended actions we’ve derived from them are simple and fairly conventional.*

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![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/02e6a719c39e4a9a77f39e800c879348765e514d2e7d6404.png)

  
A version of this course is taught near the beginning of every CFAR workshop, often as the very first class. That’s not because the concepts it covers are revelational or groundbreaking, but rather the opposite—they’re core concepts, fundamental prerequisites that underlie and inform much of the rest of our content.

If you’re already familiar with them—great! This is a quick-and-dirty overview—we don’t mean to condescend to people who’ve already had specific training in these fields, only to provide those same tools to all of our participants. If these are not the droids you’re looking for, feel free to skip ahead to Inner Simulator.

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**The Lego Principle: Bricks and bargains**
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If you’ve ever done proofs in math or logic, then you know that it’s possible to reach complex and interesting results by starting from a limited number of assumptions. The conclusions in Units of Exchange aren’t mathematically rigorous, but they do emerge from two key premises, which combine to form what we call the Lego Principle.

  
**1\. Things are made of parts**

The first half of the Lego Principle is **reductionism**, or the idea that, having fully explained all of the components of a thing and how those components interrelate, there’s nothing left to say. Metaphorically, if one has described the trees, shrubs, and fauna in all of their relevant detail, one has *fully explained* the forest; there is no ephemeral “missing” property that is forest-ness.

Reductionism is a powerful concept, because it allows us to interface with complex phenomena by dealing with smaller, simpler sub-phenomena. Brains, emotions, societies, financial markets—these are all large, and sometimes daunting to engage with. But neurons, cognitive if-then patterns, social norms, and individual commodities are all at least *relatively* more tractable.

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/019cdb27a3d0854108a63efc67e4165fc52bacf8bf13908b.png)

  
**2\. Parts may be exchanged**

The technical term here is **currencies**, and the idea is that, just as we can trade dollars for pounds (and buy things with either, in a place like an international airport), so too can we trade money for effort or sleep for knowledge or respect for social influence. In particular, where things are made up of *similar parts*, we can make exchanges between them, swapping our resources around to prioritize what we think is important.

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/73066ec03878ca7db1bfa8c4b08010b651da8fbcf1a9a7a3.png)

Most of the rest of this unit boils down to straightforward applications of these two premises. There are things that we want more of—time, money, motivation, pleasure, attention, energy, knowledge, stuff, sleep, respect, be- longing, accomplishment, the well-being of the people we care about. Some of these wants are instrumental—we want them because they will lead to other good things (money being the classic example). Others are more terminal— they’re good in and of themselves (such as happiness or satisfaction).

Since life isn’t perfect and most of us aren’t all-powerful, we make trade- offs. We skimp on sleep to get more work done, bail on a work party to spend time with a significant other, skip dessert because we’re trying to get in shape. To a great extent, making good decisions can be framed as paying close attention to the exchange rates between these various currencies.  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/797240c29b9d08bba1a5b6047cdf3c07874ad927945d7c14.png)

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**Part I: Apples to oranges**
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Some people benefit from converting *everything* in their lives to a common currency. You can imagine a particular “chunk” of good, like your favorite menu item at your favorite restaurant, and make productive comparisons. Will this vacation be worth 100 sesame chicken dinner combos? Are you willing to have one less dinner combo per month, to pay for a gym membership? Is the amount of happiness you’re expecting to get out of a frivolous purchase more or less than a couple of dinner combos?  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/0f28b1d3b1a69220db9d37a1561b726b80ff281a4c53839a.png)

  
This can be a valuable exercise in many ways, but it’s important to recognize that it’s a simplification, a shorthand. Most of the things we do involve multiple currencies, and when you try to boil them down to a single number, you’ll often find that you’re either leaving things out or spending way too much time arriving at exactly the correct appraisal. Your dinner combo may cash out in your head to $12, but it *also* takes time to order, and saves time otherwise spent cooking. It provides a certain amount of visceral satisfaction, and hits or misses various nutritional goals. It may be part of a weekly tradition with friends where you gain social value. It’s complex, with lots of moving parts.

This is true of many currency-type situations. One of the most common exchanges in our society is in the workplace, where we trade time and effort for money. Yet many of us work jobs that pay “less than we’re worth,” because money is not the *only* thing we’re getting out of the transaction—think of altruists and philanthropists working at non-profits, or people taking a risk on their big startup idea. When we consider the value of our time, money is a good first approximation, but it’s rarely the whole picture. If you offer me $1 per hour to sort pencils, I’ll say no; offer me $1000 per hour, and I might say yes. By negotiating back and forth, we can get a sense of my default hourly rate for thankless tasks—but that doesn’t touch on tasks that *aren’t* thankless, or issues of supply and demand and specialization.  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/fde868acecd688a041c0269ca3afdee94a9117cab3194f48.png)

  
Teachers often exchange large amounts of time and effort for moderate amounts of money, but large amounts of personal satisfaction and a chance at greater impact.

**Moral: Costs and values are often made of multiple parts. **

**Moral: Seek simple comparisons, but also mistrust them.**

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**Part II: Relevant value, relevant cost**
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Imagine that you’re in the market for a new microwave. You’re standing in the aisle, looking at three options—one for $89, one for $199, and one for $389. How do you decide?

It may be that you have a certain budget for microwaves, and that’s that—sometimes, a particular currency is the overwhelming limiting factor, and if your bank balance is low, all other considerations come second. But imagine that you have room to at least *consider* all three options. What are the relevant details?  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/5b9e2752ca850242d1ff3d8bd5ff1d3419c3226bdd7a5546.png)

  
Cost is one, obviously. Quality is another—some combination of power, reliability, versatility, and durability. Aesthetics might also be a factor, or energy efficiency, or ease of use.

The consideration that most people miss, in this case, is *time*. A microwave is a device you’re likely to use almost every day, perhaps multiple times a day, and a quick Google search shows that the average microwave lasts around nine years. That’s somewhere between two and three thousand uses, at a minimum. This means that the difference between a microwave that heats your food properly in two minutes on the first round and one that takes four or five minutes with repeated breaks to check and stir is enormous. It’s an extra frustration on or off the pile every day for years; an extra hour saved or wasted every month.

You can do a similar calculation based on how much happiness or satisfaction you get from evenly-heated food versus food that's boiling in some spots and cold in others; the difference between, say, "zero-point-two 'happies' per microwave use" can add up!  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/452dca936de03950e591656298fd56e09a68abb20dbbd88f.png)

  
That doesn’t necessarily mean that the most expensive option is always the right choice. But it’s a valuable way to reframe the problem. When you’re standing in the store, it’s easy to think that the *only* tradeoff is between money and quality. It’s hard to remember that “quality” has other ramifications, and usually worthwhile to unpack them, at least a little. You might save a couple hundred bucks on the spot, only to lose a dozen hours in the future—a dozen hours that, for most of us, are ultimately worth much more than the one-time hit to our bank balance.

**Moral: The real cost isn’t always on the sticker.**

**Moral: Beware repeated costs—they add up!**

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**Part III: Diminishing returns**
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![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/840baa0807fa82910fb16846287e30d3dd02a1cce0869ccf.png)

From [xkcd.com](https://xkcd.com/309/)

There is a cost to pursuing any strategy, whether it’s in time, money, effort, resources, etc. Most strategies have diminishing returns, meaning that, as you keep at them, you get less and less out of an additional marginal bit of effort. Think about continuing to make sales calls in a small city after you’ve already tapped all of the obvious buyers, or clicking forward to the tenth page of Google results, or eating your fifth slice of pizza.  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/f15499ac9dd2bb7cac4203a7b0d9cac8a7570a27abfdf6e6.png)

  
There’s a general principle (often called the Pareto principle or the 80/20 rule) which states that eighty percent of the *results* come from twenty percent of the *effort*. It’s not a hard-and-fast rule, of course, and there are situations where it doesn’t apply at all. But for many strategies, it’s best to put forth strong effort in the early stages, get the bulk of the low-hanging fruit, and then switch to something else. When you start running, or begin coding, or change the way you socialize, you’ll see steep improvement that eventually starts to level off.  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/895b34dba0c269bef06e012e5a30d6163f7c829b015bca81.png)

  
Consider “information” as an example. The **value of information** is how much better you expect your life to be based on the information you’re seeking—a balance of how much of a difference that information *could* make, and how likely it is that it *will* make that difference. For instance, if you’re searching for plane tickets, more information could conceivably save you hundreds of dollars, but the *odds* of you finding such significant savings may not be clear.

Most of us have an instinctive grasp of this principle. If the first ticket we come across is $1500, we immediately glance down the page to get a sense of the possible savings—are all of the options in the same range, or do some of them dip down below $1000? We then spend time and effort accordingly—if it *feels like* an extra ten minutes of digging might save us five hundred dollars, we keep going, and if it feels like we’ve pretty much seen all there is to see, we stop searching and buy the best ticket we’ve found so far.  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/5bafb4b5e6c6d706fa513d820621af75b72c06eebade9fd9.png)

  
The key is to employ this same metastrategy everywhere it makes sense. Keep your eye on the marginal value of each extra hour, each extra dollar, each extra drop of motivation or discipline, and when that value starts to dip, use that as a reminder to ask yourself: do I expect this strategy to continue paying for itself, or is it time to change course?

**Moral: Early gains tend to be the largest.**

**Moral: Every strategy eventually stops being worthwhile.**

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**Part IV: Arbitrage**
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“Arbitrage” is an economics term that essentially boils down to “take advantage of the fact that things have different prices in different places.” If silver costs $5 per ounce in one part of the world, and $25 per ounce in another, and you have the proper logistics in place, you can buy an ounce where it’s cheap, sell it where it’s expensive, then take the $25 you’ve earned and use it to buy five ounces, sell them both, and so on.  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/2871b76b8986618a1e04779a88a6fb9b9cbf725486846363.png)

  
Arbitrage has the effect of leveling out prices—you can’t keep that process going forever, because at some point the supply in the cheap place will drop, and the demand in the expensive place will drop, and things will be *consistent* between the two markets. But in the meantime, you can exploit the inconsistency to make money out of (essentially) nothing.

There are similar opportunities for arbitrage in our own personal “currency markets.” Most of us are inconsistent in how we prioritize time, money, energy, social effort, and other resources—we overspend in some areas and underspend in others, effectively “narbitraging” ourselves. By targeting those inconsistencies and shifting resources around, we can create extra value even without adding anything new to the system.

We’ve already touched on one example above—we lean toward buying the cheaper microwave to save money, but may overlook the possibility that buying the more expensive one can save us significant amounts of time, some of which could be used to earn more money than we spent in the first place. Paying attention to the relationship between time and money in the long term changed the calculus of the purchasing decision, likely for the better.

Other examples:

Someone who rigidly holds themselves to a superstrict diet and spends lots of willpower to (e.g.) turn down delicious homemade cake at a party, and then burns out and binges on cheap potato chips three days later. The currencies being traded here are effort, health, and food-related happiness; this person bankrupted themselves on the former, and got compromised versions of both of the latter. If instead they had eaten some cake, they would have retained willpower, taken a comparable hit to their health, and gotten significantly more food-related happiness—a better outcome.  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/5d01e0ba613bda8cf0241e53a2eae140d3c8701f0d77e172.png)

  
Someone who consistently struggles to come up with thoughtful, meaningful gifts for their family and friends, and who usually spends the week before Christmas or birthdays wracked with guilt and stressing out over what to make or buy. The currencies being traded here are time, attention, and goodwill/warm fuzzies; this person spends a large amount of both of the former for uncertain results on the latter. If they instead create a single, easy place to store gift ideas year-round, they can decrease the costs in time and attention and be more likely to pinpoint and remember the things their families and friends actually want.  
 

![](https://39669.cdn.cke-cs.com/rQvD3VnunXZu34m86e5f/images/ed00fa4b6b0ac240903a0b2c6091d041af07cdbbd53d4cd3.png)

  
Someone who spends dinner time bouncing back and forth between work texts/emails and conversation with family and roommates. Currencies being traded here are time, attention, effectiveness, and the other diners’ sense- that-they-matter; by juggling two important things, this person is likely to fail at both. If they instead shorten their dinner commitment to twenty minutes, but are *fully present* before going back to work, they can spend the same amount of time, reduce attention overhead and switching costs, and improve both their ability to get the work done and to show affection for their family and roommates.

The most important piece of this puzzle is the recognition that **attention to tradeoffs ≠ being cold and calculating**. Often we feel a little strange doing things like arranging to see all of our friends at the same party, because there is a sense that this is cheating or manipulative or somehow disingenuous. And it’s true that making small, specific sacrifices in the process of seeking arbitrage can *draw your attention* to tradeoffs that are somewhat uncomfortable.

But it’s important to recognize that *those tradeoffs were already happening*. It’s like hospital administrators making tough calls between expensive procedures for sick children and new equipment or raises for surgeons. We already trade time against money against effort against happiness against social capital—we can do so blindly, and hope for the best, or we can think about them carefully and deliberately, and take advantage of opportunities to get more of *everything*. If your schedule is overloaded, you’re already shortchanging your friends by being distracted or exhausted or otherwise sort-of-not-really-there for them; rearranging things to see more of them in groups isn’t taking anything from them, and it’s *giving back* to yourself.

(And if it turns out that it *is* taking something from them—if you discover that some of those relationships need more one-on-one time than you thought—you can change the plan again!)

This is the key. You have limited amounts of time/money/effort/etc., so it makes sense to waste them as little as possible—you’re not looking to sacrifice one part of your life for the sake of another, you’re looking for ways to increase one part at no cost to the other, or to raise the overall available amount of every currency by fixing the leaks.

**Moral: Identify** ***all*** **relevant currencies, and note which are being spent faster or are more valuable**

**Moral: Proper arbitrage isn’t win-lose, it’s win-win. You can reinvest the recouped resources however you want, including right back into the thing you just made more efficient.**

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**Part V: Opportunities for growth**
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The following are some areas where many CFAR alumni have found significant opportunities for improving the tradeoffs they were making:

*   Rearranging commutes or other regular time commitments
*   Improving reading or typing speed; switching to audio books
*   Using earplugs, eye masks, and white noise to improve sleep quality
*   Regular re-evaluations of job, career, salary, project, team role, etc.
*   Efficiency systems like keyboard shortcuts, email routines, & to-do lists
*   “Batching” small recurring tasks to avoid switching costs
*   Making one-time purchases (including “purchases” of time, energy, or social effort) that remove or reduce the cost of a repeated expense
*   Using Craigslist, Uber/Lyft, Ebay, OKCupid/match.com, mailing lists, and event calendars

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**Units of Exchange—Further Resources**
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Explicit calculations are useful in part because people’s intuitions often have a hard time dealing with quantities (for a review, see Kahneman, 2003). In a classic study on scope neglect, people were willing to spend about as much to save 2,000 birds as to save 200,000 birds. Similar insensitivity to variations in quantity, which Kahneman (2003) calls “extension neglect,” arise in other contexts. For example, people’s evaluations of an experience (such as a medical procedure without anesthesia) tend to be relatively insensitive to its duration (compared to the peak level of emotion).

Kahneman, D. (2003). *A perspective on judgment and choice: Mapping bounded rationality.* American Psychologist, 58, 697-720. [http://tinyurl.com/kahneman2003](http://tinyurl.com/kahneman2003)

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People are more sensitive to quantities when they can make side-by-side comparisons of multiple options which vary on that quantity or when they have enough familiarity with the subject matter to have an intuitive sense of scale, but in the absence of these conditions a person’s intuitions may be essentially blind to the magnitude of the quantity (Hsee, 2000). In order to incorporate the magnitude in one’s judgment, it may be necessary to engage in explicit effort to make sense of it.

A review article on “attribute evaluability,” which is the extent to which a person is sensitive to quantitative variations in an attribute:

Hsee, C. K. (2000). *Attribute evaluability and its implications for joint- separate evaluation reversals and beyond*. In D. Kahneman & A.Tversky (eds.), Choices, Values and Frames. Cambridge University Press. [http://goo.gl/3lXoD](http://goo.gl/3lXoD)

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Research on decision making suggests that people who care a lot about mak- ing the best decision often neglect the implicit costs of the decision making process such as time and money. For example, they might spend a lot of time trying to pick a good movie to watch (neglecting the time cost) or channel surf while watching television (neglecting how dividing attention can reduce enjoyment); self-reports of both behaviors have been found to correlate with personality trait of “maximizing.”

Schwartz, B., Ward, A., Monterosso, J., Lyubomirsky, S., White, K., & Lehman, D.R. (2002). *Maximizing versus satisficing: Happiness is a matter of choice.* Journal of Personality and Social Psychology, 83, 1178-1197. http://goo.gl/HLImnQ

Alumni Lincoln Quirk’s essay on how to put a dollar value on one’s time: [http://goo.gl/fVDuFj](http://goo.gl/fVDuFj)

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A blog post with several vignettes in which VOI calculations are relevant:

[http://lesswrong.com/lw/85x/value\_of\_information\_four\_examples/](http://lesswrong.com/lw/85x/value_of_information_four_examples/)

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The introduction to Aaron Santos’s book provides a simple guide for how to make rough estimates of quantities, and how to break a difficult-to-estimate quantity into components. The rest of the book contains sample problems for practicing Fermi estimation.

Santos, Aaron (2009). *How Many Licks? Or, How to Estimate Damn Near Anything.* [http://goo.gl/8ytNye](http://goo.gl/8ytNye)

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Related comics and essays by Randall Munroe:  
"[Is It Worth the Time?](http://xkcd.com/1205/)"

"[Paint the Earth](http://what-if.xkcd.com/84/)"

"[A Mole of Moles](http://what-if.xkcd.com/4/)"