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I think what LPR is saying is that its stupid to say "I redeemed my 50K miles for a $5000 ticket so I got 10 cents per mile", if you could have just bought 50K miles for $1500. Since you are dealing with all the restrictions of using miles they can inherently not be more valuable than the cost of buying the miles. It might be rational to spend the $5000 on the ticket because you earn miles, or its tax deductible, or there are no award seats available, but you simply cannot say that the miles were worth $5000 if you can buy the miles for $1500.
Another example might be my Panasonic plasma TV. If might be worth $5000 to me. I enjoy it that much and if that's how much all tv's costed I might be willing to pay that. But I do not say its worth $5000 because that's how much I would be willing to spend, its worth at most $1000 because that's how much it would cost me to replace it. Put most simply: The value of something is the lesser of the value derived from it or the replacement cost. If 50K miles gets you a flight that cost $5000 retail but you would have only spent $1000 and 50K miles cost $1500 then the miles are worth 2 cents each. If instead 50K miles only cost $750 then the value of the miles is only worth 1.5 cents. I also question even 2 cents as the value of a mile because I have seen plenty of opportunities to buy them for less. If everybody is valuing them at 2 cents then there should be a mass rush to buy when they sell for 1 or 1.5 cents. |
LPR,
You are using 2 cents as your baseline because you argue that you can easily get cashback at 2%. I question your assumption as most 2% cards I know of have some catches like requiring money to be spent on travel. I googled some and found a link for the top 2% cards but none are a straight 2% cashback. Do you have a card that is still available and offers 2% cashback? I am currently receiving 3 hilton points which I value at 1.5 cents because I do not know of somewhere I will actually net 2%. Granted I am also willing to pay a little more for an Amex so that might tack on another quarter cent or so. http://creditcardforum.com/blog/2-ca...k-credit-card/ |
I personally value them at 1 cent a mile because they are so inflexible and such a hassle to use. (Former Northwest, current Delta flyer here.) Granted, I can and have redeemed several times for tickets that would have cost much more...but this is offset by friends and family members who have NEVER redeemed a single trip and who have gotten angry, frustrated, and even thrown away ("donated") their miles. Even with the financial crisis, there are people who have more money than time or more money than patience, and for them a frequent flyer mile (at least one as difficult to use as the Skymile) is really of almost no value at all. People who have more time and patience than money are probably a minority of people who travel regularly by air. So there is no puzzle here: my guess is few outside the ranks of dedicated hobbyists/Flyertalkers would value miles at 2 cents per mile. They may start collecting miles with good intentions but the "hassle factor" eventually makes them give up in disgust. Just my speculation...
I also question even 2 cents as the value of a mile because I have seen plenty of opportunities to buy them for less. If everybody is valuing them at 2 cents then there should be a mass rush to buy when they sell for 1 or 1.5 cents. |
Originally Posted by hindukid
(Post 19892710)
...card that is still available and offers 2% cashback?
https://www.fidelity.com/cash-manage...-express-cards https://www.pricelinevisa.com/apply/...rerid=HOMEPAGE |
Originally Posted by mia
(Post 19892815)
Yes
https://www.fidelity.com/cash-manage...-express-cards https://www.pricelinevisa.com/apply/...rerid=HOMEPAGE The priceline card looks interesting. |
Originally Posted by hindukid
(Post 19892869)
As far as I know the fidelity card requires having a fidelity account. .
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Originally Posted by LPR
(Post 19890859)
The concept that most people don't understand in valuation is Opportunity Cost. Simply put, this is the next-best alternative you forgo. In other words, let's assume you value American Airlines miles at 1.5 cents. If you have a credit card that earns you 1 mile per dollar, then you are actually not maximizing your utility, since there are credit cards out there that will earn you 2% on everything. You are essentially "losing" 25% of your maximum utility. In other words, assuming no sign-up bonuses, if you don't value any of your points higher than 2%, your opportunity cost is higher than the value you are deriving from spend.
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Originally Posted by hindukid
(Post 19892680)
It might be rational to spend the $5000 on the ticket because you earn miles, or its tax deductible...
It very often tips the decision one way or the other for people who are paying attention. |
I enjoy reading these discussions on valuation and the different perspectives people have. For me personally though, coming up with specific valuations isn't a good use of energy. I look at collecting points/miles as a hobby. I have some time to spend each day doing this, and the real value is in the pleasure I derive.
Points and miles are quantized. The value of my first 100 miles in a program is basically nothing for me, but the last 100 miles needed to attain an award can be worth spending some cash. I tend to take opportunities as I find them - going for low hanging fruit - until I notice I am getting close to being able to do something with them. That's when I start daydreaming about what I can do and go for the goal line. I don't have the opportunity to travel as much as most of you do. Maybe if I got to travel more than once or twice a year I do it differently. Kudos to you who are able to maximize your return, but I'm just thrilled to be having fun and saving some money at the same time (whatever that amount of money is). |
But we in The New Economy live in Looking Glass World, not The Real World. In Looking Glass World we manufacture spend and save our money by running up credit card debt and loose our money putting it in savings accounts where any amount below a minimum balance might be assessed bank fees. So you have to add that people may be quite rational, but motivated by unseen factors. Hence the crazy customer waltzing into the bank with a dolly containing $75,000 in boxed dollar coins, stocking out money orders at a WalMart, or buying enough pudding cups to feed the state of Rhode Island may actually acting quite rationally in a world that has gone crazy.:cool:
Originally Posted by sk8uno
(Post 19891338)
Sorry if I was unclear -- I was talking about airfare, not mergers and acquisitions. My point is that even if people can fly LAX-NYC for $x or they can buy 25,000 miles for $x-10 and use those miles to fly LAX-NYC, many people will still buy the revenue ticket. By the "corporate context" above, I meant corporate travel. But this happens even among leisure travelers.
Your statement that "no one would ever pay more than the cost to purchase [miles] outright" assumes people are (a) rational, and (b) have perfect information. **Both of those assumptions are often wrong in the real world.** All of this also ignores the fact that booking an award ticket comes with additional annoyances and restrictions. But even assuming booking award tickets and buying miles do not entail any additional transaction costs over buying a revenue ticket, I still stand by my statements. :) |
Why would there be a mad rush? So long as I can manufacture miles for free to meet anticipated demand, I need not buy them for 1 to 1.5 cents. But when my need for miles suddenly increases beyond the capacity of my generating systems, then I buy miles in that price range. The problem is that stockpiling miles is not like stockpiling gold, but rather like stockpiling milk.:cool:
Originally Posted by hindukid
(Post 19892680)
I think what LPR is saying is that its stupid to say "I redeemed my 50K miles for a $5000 ticket so I got 10 cents per mile", if you could have just bought 50K miles for $1500. Since you are dealing with all the restrictions of using miles they can inherently not be more valuable than the cost of buying the miles. It might be rational to spend the $5000 on the ticket because you earn miles, or its tax deductible, or there are no award seats available, but you simply cannot say that the miles were worth $5000 if you can buy the miles for $1500.
Another example might be my Panasonic plasma TV. If might be worth $5000 to me. I enjoy it that much and if that's how much all tv's costed I might be willing to pay that. But I do not say its worth $5000 because that's how much I would be willing to spend, its worth at most $1000 because that's how much it would cost me to replace it. Put most simply: The value of something is the lesser of the value derived from it or the replacement cost. If 50K miles gets you a flight that cost $5000 retail but you would have only spent $1000 and 50K miles cost $1500 then the miles are worth 2 cents each. If instead 50K miles only cost $750 then the value of the miles is only worth 1.5 cents. **I also question even 2 cents as the value of a mile because I have seen plenty of opportunities to buy them for less. If everybody is valuing them at 2 cents then there should be a mass rush to buy when they sell for 1 or 1.5 cents.** |
Originally Posted by AlohaDaveKennedy
(Post 19895848)
Why would there be a mad rush? So long as I can manufacture miles for free to meet anticipated demand, I need not buy them for 1 to 1.5 cents. But when my need for miles suddenly increases beyond the capacity of my generating systems, then I buy miles in that price range. The problem is that stockpiling miles is not like stockpiling gold, but rather like stockpiling milk.:cool:
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Originally Posted by hindukid
(Post 19892710)
LPR,
You are using 2 cents as your baseline because you argue that you can easily get cashback at 2%. I question your assumption as most 2% cards I know of have some catches like requiring money to be spent on travel. I googled some and found a link for the top 2% cards but none are a straight 2% cashback. Do you have a card that is still available and offers 2% cashback? I am currently receiving 3 hilton points which I value at 1.5 cents because I do not know of somewhere I will actually net 2%. Granted I am also willing to pay a little more for an Amex so that might tack on another quarter cent or so. http://creditcardforum.com/blog/2-ca...k-credit-card/ But I always carry the 2% HSBC card and make most decisions based on the 2% return that I get with that card--if higher returns are not available with another card. Like most on here, I rarely use cash. |
I'm in InfrequentFlyer's camp, but even more so. I don't put a monetary value on the enjoyment I get from my friendships, my family members, my dogs, or from those perfect ski runs on a sunny day. I would never in a million years pay money for a first class flight between Hong Kong and Los Angeles on Cathay Pacific, but it is one of those experiences I will probably never forget, particularly since a few days earlier I had been trekking in Nepal. I try to maximize my points and miles so I can do the things I couldn't otherwise do. My next goal: a first class flight on Emirates. And I have no idea what it would cost if I paid for it, because I wouldn't.
I do understand, though, that for some people, part of the hobby is to try to maximize values, and I value the information you share because I find it interesting, as long as someone else is doing the math. Each to his/her own and may the new year bring us all lost of miles and lots of upgrades. |
I think the source depends also. When most of my miles were just a work perk I didn't really think about their value too much. I also was a total novice and just knew enough to keep things from expiring.
Now that I am picking and choosing credit cards for bonuses I have to assign values to them in order to pick the best offers. I am relatively conservative in my values, based more on what I'd spend than an aspirational value. That said, I am an accountant and I take a little too much pride in the spreadsheet that I have cobbled together to track it all. |
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