Lattés and lotteries

Behavioral New World

March 1, 2024

Lattés and lotteries

In case you’ve missed it, the Great Latté Debate is raging in the personal finance space. The question is, Does buying a daily latté fiercely damage your financial health or is it largely irrelevant?

In one corner is Dave Ramsey (link here) who estimates that if you buy one cup of coffee every day for a year, you will burn up a hefty $766.50. He is joined by David Bach (link here): “Here’s how giving up coffee can make you rich.” His calculation: Give up your $5 daily coffee, earn 10% on your investments, and in 30 years you’ll have almost $340,000.

In the other corner:

Helaine Olen (link here): “Buying coffee has nothing to do with debt.” She argues that the assumptions underlying the calculations of the “lattés are financial death” camp are exaggerated. For example, one might not buy a coffee every day. And a 10% rate of return might be optimistic; at the least, it is not certain.

Joining Helaine is Matt Paulson (link here): “Why ‘Skip the latté’ is terrible financial advice.” Among his arguments: Might you not just spend the money elsewhere?

Those are the battle lines, so far at least. What’s my view? For starters, one-size-fits-all financial advice never makes sense. Surely there are people for whom a daily latté is a non-trivial part of their budget. And equally surely, there are people for whom a daily latté barely moves the financial needle.

Echoing this notion, a recent email from Jared Dillian (link to his website here) is titled, “It’s Not the Little Things; It’s the Big Things.” He goes on to say, “When does little stuff become big stuff? It depends on your income.” Yes, exactly.

Meanwhile, James Choi brings us back to the fundamentals with his excellent article (link here), “Popular Personal Financial Advice versus the Professors.” He emphasizes that the key to amassing wealth is saving, that is, spending less than one makes, which I applaud.

Perhaps the best way forward in this latté skirmish is to consider how we view the ultimate utility, or usefulness, of the product in question. In this case, a latté often can be much more than the mere object of a financial transaction: It is also the much-welcomed jump-starter to the day that can reliably deliver a sense of well-being. It can also jolt you awake a bit, or a lot, depending on your sensitivity to caffeine.[1] Those two features alone could be well worth the cost. Also consider this: The more awake you are, the better you are likely to perform your job. The better you perform your job, the greater your chances for further financial remuneration down the road. 

I reckon that most latté lovers, without explicitly thinking about this, have made that calculation in their heads, even subconsciously, and figured that they come out ahead.

Keeping that notion in mind, we can learn a few things by noticing the similarities between buying lattés and buying lottery tickets.  How are they related? Lattés are, after all, a sure thing—you know what you’re going to get for your money. Lottery tickets are far from a sure thing. Buying lottery tickets is often derided as a “stupidity tax” because of the very remote chance of winning the lottery. However, “latté logic” can apply to spending on lottery tickets.

In a lovely article, “Buying lottery tickets is smart,” Paul Bloom argues that purchasing a lottery ticket is buying hope (here’s a link to his website). To be clear, he is talking about small-scale ($5 per week), “occasional” purchases.[2] He estimates that someone foregoing these modest purchases can accumulate about $11,000 over 20 years. Perhaps that’s not chump change, but it is hardly life-changing (what will $11,000 buy 20 years hence?). One cost of this behavior: 20 years of less hope each week.

Does buying a lottery ticket that doesn’t pay off for a month give us a month’s hope for a minimal expenditure? Maybe so, but I’m unaware of any such lotteries; governments want to raise revenue (about 47 cents of each dollar of lottery revenue) and thus favor more frequent payoffs.

So buying a lottery ticket could be viewed as a purchase that positively enhances one’s internal psychological state by providing a nice dollop of hope at a fairly minimal price.  That is, a “positive emotional effect” is purchased and delivered. And couldn’t we say the same of lattés?

So are a daily shot of caffeine and a weekly shot at wealth keys to good psychological health? (A question, not advice 😊)

---

[1] According to one expert, it is best to wait 90 minutes after waking before consuming caffeine. https://shorturl.at/crEM1. Isn’t it amazing what you learn from this newsletter? 😊

[2] Actual behavior does not conform to the advice to spend only if it is a “small thing.” For example, people making less than $10,000 a year spend 6% of their income (about $11.50 per week) on lottery tickets. See https://www.focusforhealth.org/the-lottery-the-poor-are-playing-and-the-wealthy-are-winning/