Note: this post was written back in 2013. But I think it’s still relevant, so we’re reposting it this morning.
Some life lessons that usually get learned after the fact:
- If you get a cheap lawyer, you have to pay him, and then you have to get an expensive lawyer to fix both the original problem and the even bigger one that the cheap lawyer created.
- If you visit a cheap tax consultant, you pay a lot of tax (or you pay no tax initially, and then you get hit with a massive tax audit and a potential jail sentence somewhere down the line).
- If you sign up for a cheap insurance, you’re probably not covered for very much. And, certainly, nothing that you claim for.
- If you get treated by a cheap doctor, you might die sooner than expected.
I guess maybe you can’t really learn from number 4. But here’s a possible silver lining: perhaps your children will learn from it.
But that aside, here’s an old adage: “No free lunches”
Good Deals and The Market
Exercising cheapness means belonging to the “I win when you lose” school of thought. You’re looking for that point where you clearly get the best end of the deal, and the other guy is the unwitting mug that walks away with that sensation of having just been robbed.
Which is fine – I mean, good for you if you manage to do it.
But it’s probably not a long term strategy.
Let me explain it using some old-school demand and supply graphs.
The principle of demand is: as the price of something goes up, so I’ll want less of it.
The principle of supply is: as the price of something goes up, so I want to sell you more of it.
And when you put it all together, you end up with the following graph:
That’s basic economic theory, right? Where my demand spectrum and your supply preferences intersect, we’ll settle on a price and a quantity to be supplied.
You’ll notice that I’m only talking about quantity (the number of items, or the number of hours of time, or whatever). The above graphs don’t say anything explicit about quality. The reason for that: if the quality goes up, I’ll actually want more than I originally wanted at every price. So something like the orange line below:
But let’s put that aside for the moment, and spend some time reflecting on el Cheapo in the corner with the tight-sphincter expression. What does he/she/ze want? They want the same things as everyone else, just for less than what everyone else is paying. And they want to do that at every single price.
What they’re actually saying: they want more than everyone else at any given price.
In fact, if we say that most people (ie. the market) has the purple demand curve, then the demand curve for the misers amongst us is the orange one. Which seems a little counter-intuitive (don’t they want to pay less than everyone else?), but let me try and give an example:
- I hire a labourer for $100 – and I expect him to work 20 hours for me (ie. I pay him $5 per hour).
- If I were cheap, I might still hire a labourer for $100 – but I’ll expect him to work 30 hours for me (ie. $3.33 per hour).
- What this looks like:
Isn’t that the definition of a good deal: more bang for your buck?
The problem, in the long run, is that one or more of the following ends up happening:
- The person I hired leaves me just as soon as they can for someone paying a more reasonable rate; or
- The person I hired is only willing to work for 30 hours if they get paid, say, $175 (ie. $5.83 per hour) – so they’ll work for 30 hours, as long as they can somehow steal and/or cost you the difference; or
- The person I hired takes about a third of their time on sick leave. Or on facebook. Or having coffee on my credit card.
Here’s a scary fourth alternative: the person I hired is actually willing to work 30 hours for $100. Why is that scary? Well, the more important question is why they’re willing to work so cheaply. And the risk, especially with skilled professionals (like doctors and lawyers), is that they’re the workers that no one else wants at the market rate. Because they’re so bad at what they do.
I’m going to close with another adage: “You tend to get what you pay for”.
Even if you only pay for it in the end.
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.