Rock beats scissors, and scissors beats paper, so rock is better than both scissors and paper. That’s not right at all…

We all know paper beats rock, but we also know that 10>7>3 leads us to 10>3. Some things can be ordered with a set of absolute preferences while others can’t. You might recognize this as the transitive property. In both the transitive and non-transitive cases, though, we can all at least agree on which of two items is “better”.

In fact, you probably make hundreds of such comparisons each day. Which road are you going to drive on to work today? Should you invest in Facebook or Amazon? One of roads will get you to work faster than the other one. A year from now, one of those stocks will have generated more profit. There’s no way to know a priori, but there’s definitely a “right” answer for both questions. The outcome is influenced by traffic and the market, so you have to settle for an educated guess when you make your decision.

No matter who sits in the car, or who buys the stock, the best decision is still the best. Saving three minutes in your commute is good for anyone, as is earning three extra dollars. But what if you had to choose between those two? Which is more valuable, three minutes or three dollars? An economist might divide your salary for the year into the amount you would earn in those three minutes and tell you which dollar amount is higher. That’s a flawed comparison, though, because you can only convert one way. You can trade your time for more money, but not your money for more time. (Well, maybe that’s what healthcare is, but we’ll tackle that another time.) Assuming you work five days a week, you’re still going to get 48 hours in your weekend, and not a second more. An extra hour of freedom might be worth hundreds of dollars to you. Or maybe not. You might work a second job, or take on some freelance work.

The crucial thing to realize is that the answer will be different for your neighbor. “How can she spend so much money on a vacation?” is a valid question, while the other person is asking “How can she spend so much time looking for sales?”. You and I have different utility functions, and without those differences, society would fall apart. By trading money, time, and goods with each other, you maximize your own utility function while also helping me maximize mine.

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This post was inspired by somebody who went to Dominique Ansel Bakery to try the world-famous cronut. Her friends had told her the cronut was the best thing on the menu, and that the DKA was number two. She absolutely loved the DKA when she tried it, and couldn’t wait for the cronut, but she hated the cronut so much that she actually threw up. This story highlighted the difference between her utility function and her friends’.