Nick Reyes at the wonderful blog Frequent Miler asks, “Are points worth what they buy or what they save?” And he’s got me thinking. I currently have over a million miles and points stashed away. Why?
And what are my points and miles worth?
(Spoiler alert: I think that neither “what they buy” nor “what they save” is the right approach, because, surprisingly, what something’s worth depends on how it was obtained. Keep reading to see why.)
Background: suits and cameras
By way of background, I remember preparing for a major book tour and asking a friend who works in the fashion industry what I should wear when I speak. The issue is that my target demographic expects a suit and tie, but I don’t want to look like a banker. So I needed advice.
“How much do you want to spend?” she asked.
“Not a lot,” I said.
“Well,” she replied, “you’re just throwing your money away if you spend less than five thousand on a suit.”
Five thousand dollars?! For five grand, I thought, I could almost buy a good camera…
(Leading up to the issue of cost, my friend had asked background questions that should have clued me in to a difference of opinion — like “What texture is your current suit?” No one told me suits come in textures.)
The obvious message here is that different people value things differently. That’s not surprising, but…
When is a dollar not a dollar?
…what is surprising is that even the same person can value two things of equal value differently, as Nobel Prize winner Richard Thaler demonstrates. His example involves two questions about theater tickets.
Suppose you and a date have expensive tickets to the theater (say, $250 a pop) and you show up at the theater and…
- …you find out that your tickets have been stolen from your wallet. Will you shell out another $500 to purchase two more tickets from scalpers? (Probably not.)
- …you find out that $500 in cash has been stolen from your wallet. Will you scalp your tickets to recoup the $500 you lost? (Again, probably not.)
In the first scenario you value $500 in cash over $500 in tickets, but, astonishingly, in the second your judgment is reversed!
What we learn from this is that it makes no sense at all to ask “how much are $500 tickets worth?” Without knowing the circumstances, the only answer is “sometimes less than $500 and sometimes more than $500,” even to the same person, and even if tickets can be bought and sold at face value.
This line of thinking is, I believe, one key to understanding points and miles.
(For more fascinating examples, check out Thaler’s NYT-bestselling book, Nudge.)
Value
In Dr. Thaler’s example, you don’t put a value on the theater tickets. You put a value on the combination of the tickets and how you get them.
In a similar example, Dr. Thaler points out that people are more likely to skip an event they have tickets for if they got those tickets for free.
He recalls a time when he and a friend had free tickets to a pro basketball game in Buffalo. On the day of the game, he says, a snowstorm made travel difficult. They decided not to go. “But we would have gone if we’d paid for the tickets,” his friend said. Probably.
This means that it’s nonsense to ask, “How much is it worth to you to see the game in person?” The right question is “How much is it worth to you to use your free tickets to see the game?”
Again, surprisingly, they weren’t assigning value to the game in isolation. They were assigning value to the combination of the game and how they obtained access.
How does this apply to points and miles?
Points and miles — Nick’s example
Nick uses the example of an $1,100 hotel room at the Conrad Tokyo Hilton, which he can book for 95,000 Hilton points. Is it worth it, he wants to know.
More specifically, he asks whether his 95,000 points should be valued in comparison to the $1,100 room he’ll get, or in comparison to the $200-$300 he would otherwise spend on a room.
In the first case, his points would be worth about a penny a piece, while in the second, only 1/3 of a penny.
I think both approaches are wrong, because, astoundingly, the price of the rooms may have very little to do with the value of the rooms. I don’t just mean that different people value a fancy room differently (though of course they do).
I mean that — as Dr. Thaler demonstrates — even Nick himself may value the room differently depending on how he gets it! The exact same room may be worth more to him if he buys it with cash and less to him if he “buys” it with points.
This can make it exceedingly difficult to determine the value of his points.
Points and miles — my examples
A few years ago a traveled to Australia for work. Not wanting to fly for 25 hours in coach, I used 180,000 Delta miles to fly round-trip in business class, transferring in China. Then a Delta glitch forced me back to coach for an internal flight in China on my return, so to make it up to me, Delta put me in first class on the 15-hour flight back from China to New York.
I would later learn that I was flying on a $15,000 ticket! But does that matter? Were my points worth eight cents each? I don’t think so.
Similarly, I just flew to Israel, redeeming a whopping 250,000 Delta miles for a business class flight over, with, sadly, a return in coach. (Israel is “only” about 10-12 hours away.) Coach tickets on Delta were running about $1,800 round-trip at the time, and business class on Delta at about four times that. So my combination might have cost $5,000 in cash. Were my points worth two cents each? Again, I don’t think so.
Value, again
In these cases — Nick’s and mine — and more like them, I think we see the same emotional error: the temptation to try to value something without looking at how it was obtained.
My valuation of my flights doesn’t just come from the flights. It comes from how I “paid” for them, in particular, for me, the feeling that they are free.
What I’m really getting is not this flight or that flight, but the ability to feel like I’m flying for free anywhere I want whenever I want, usually in business class.
In this context, these seem like the wrong questions: “How much is a hotel room in Tokyo worth to me?” “How much is the Conrad Tokyo in particular worth to me?” “How much is a round-trip business class / first class ticket to Australia worth to me?” “How much is a round trip business class / coach ticket to Israel worth to me?”
The right questions take the circumstances into account.
Additionally, in my case, my Delta miles come from two sources: putting most of my spend on Delta Amex and only flying Delta for work. (After shelling out 250K miles and not even getting business class, I’m reconsidering my approach, but that’s for another day.)
My costs are that I only fly Delta (sometimes transferring instead of flying direct), and that I give up a grand or two a year that I could have earned in cash back from using a cash-back card instead of Amex.
My payout is not this flight or that flight. My payout is the flight and how I got it.
For me, what I really get is that I feel like I can fly anywhere I want for free. That’s what I value.
And for me, giving up the cash back is worth it.
More generally, the right question compares the opportunity costs — foregoing cash back, only flying one airline, staying at one hotel chain, time, inconvenience, whatever it might be — not with the final payoff but with the ability to get that payoff with points and miles.
Nick at the Frequent Miler is right to focus, as he often does, on opportunity cost. I’ll invent facts and assume that his 95,000 Hilton points cost him (a) $250; and (b) some stays at Hilton when he might otherwise have stayed elsewhere. The wrong question compares those costs just to the room in Tokyo. The right question, it seems to me, is whether those costs are a reasonable price for him to pay to get that room with points.
Summary
Obviously, people are different and different people value things differently.
It’s less obvious, though apparently just as true, that the value of something comes not just from what it is but from how it was obtained.
This means that it’s almost a nonsensical question to ask about the value of a hotel room, or a flight, or even cash back, in isolation.
The real question has two parts: What did you get? And how did you get it?
7 thoughts on “A Surprising Conclusion About What Points and Miles are Worth”
You’ve hit on a key part of this that I think many miss. For me, the entire reason to be involved with credit card bonuses and manufactured spending is so that I can travel. Were it not for miles and points, I would travel very little, as I would end up spending my money on bills and other things. If I redeem miles to attend some boring conference for work, I don’t get nearly the value out of my miles as if I use them to go on a wonderful vacation. The emotional value of miles and points is very hard to measure.
I know you’re arguing that what you’re really getting is the feeling that you can fly anywhere you want for free, usually in business class. So, to clarify:
Does it matter to you whether you’re able to have 1 business class flight to destination X or 2 business class flights to destinations X and Y?
If your answer is that 1 is just as good as 2, just so long as you were able to sustain the feeling that you could fly anywhere you wanted for free, then, yes, you’re not really playing an optimization game.
But if it matters to you whether you get 1 or 2, then I think you are actually playing an optimization game and rational thinking (as free from cognitive bias as possible) about the values of things and the amount of your resources you expended to obtain them, will serve you well.
My understanding of cognitive biases (such as having the way we obtained something influence how we value it and then make decisions about trading it for other things, etc.) explain common flaws in the way humans and other animals think. (e.g. The hyperbolic discounting cognitive bias has been observed in other animals as well as Homo sapiens). Having such a flaw in our thinking means that we’re not optimizing for whatever our goal is. So we’re getting less of what we’re aiming for because of it.
So our challenge, should we choose to accept it, is not to enshrine our cognitive biases as representing the true measures of success toward our goal, but to augment our natural, flawed ways of thinking with aids that help us to overcome those bugs in our programs and actually get more of what we’re aiming for.
Another common cognitive bias is that we tend to mentally overvalue a price of zero (I.e. free) as compared to non-zero prices, even when compared to small non-zero prices like $1. I suspect that also plays into peoples’ thinking in this hobby.
I partially agree.
1. I certainly try to get as many points/miles as I can, and to get points and miles with the most value. (And I’m dismayed that SkyMiles have failed me in this regard!)
Of course I’d rather fly to both Africa and Australia in business class than just to Africa.
So I do try to optimize the purchasing power of my miles/points.
For example, in his write-up on FM, Nick worries that I might have obtained my 250K SkyMiles by spending $250,000 on a Delta Amex card. I didn’t, fortunately. And the way I knew not to was by optimizing my spending.
But that doesn’t mean that dollar prices on the flights have any relevance. I don’t care whether the flights I take cost $3,000 or $13,000.
Or to look at a more specific example. Suppose Delta charges $8,000 for a business class flight to Israel but United only charges $4,000. That doesn’t make the United flight less valuable to me.
2. In terms of “augment[ing] our natural, flawed ways of thinking … [to] get more of what we’re aiming for,” I think it’s helpful to notice that what we’re usually aiming for is joy, not value. See my response to “Blue.”
Man this is deep truth. Awesome.
This completely misses the point. The entire reason to establish an objective methodology for valuing points is precisely because we fall into logical errors if we don’t The fact we have a really, really tough time dealing with, say, sunk cost fallacies doesn’t make them not fallacies!
I understand what you’re saying. And I’d like to agree. Part of me even does: One of the reasons to look at things objectively is not to fall into psychological traps.
On the other hand, the psychology is all that really matters: I’d rather enjoy myself than think that I should be enjoying myself.
For example, Delta surprised me once and upgraded me, for free, from coach to business on a 10-hour flight to Israel. I enjoyed that business-class seat more than I would have if I had burned miles to get the business class seat.
Or to look at a more dramatic example: Suppose Delta had told me I had an upgrade, but when I got on the plane I had found out that my upgrade-seat was broken, and I would have to stay in coach. I would have been disappointed, but not terribly upset. On the other hand, if I had purchased a business class seat and then been downgraded to coach, I would have suffered every moment of that ten hour flight!
Sure, sunk costs don’t matter logically. But they do emotionally. And, for me at least, no amount of rationalization could convince me to enjoy coach when I’d paid for business, even though I might enjoy a flight in coach if I’d lost a free upgrade.