Hi, I'm Nick. This is my blog. I'm a life-long unschooler living in New York. You can find more about me here.

I help run the Recurse Center (YC'S10).

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Trading with friends for fun and profit

January 25, 2010

Since I'm a geek and I live with other geeks, we spend a decent amount of time talking about how we can live more efficiently. Much of this involves clever and/or nerdy application of economic ideas. Below are a few of the ideas we've not just talked abut but have actually implemented.

Move money efficiently

The most wildly successful experiment -- which, after over three years of daily use has safely moved from experiment to necessity -- has been using a simple Google Docs spreadsheet to track household and inter-roommate expenses. The idea is to get rid of the hassle of moving money back and forth by having a spreadsheet that keeps tabs on how much each roommate has spent, what percentage of each transaction each is liable for, and how much each owes or is owed by the others. It's simple, easy to use, and works wonderfully.

Use local knowledge

This one dawned on me only recently, but in retrospect it should have been obvious. After hearing a friend complain about high interest rates on his credit card debt, I saw a golden opportunity. Right now, you're lucky to get 2% on your savings (e.g., with SmartyPig) and maybe 3% on a CD -- assuming you're willing to lock your money up for five years.

So, suppose a friend, whom you trust and whose earnings potential, intelligence, character, and more you can firmly vouch for, is paying three or four times the best savings interest rate you can get in credit card debt. By simply taking the average of the rate you're getting and the rate he's paying, you and your friend can both profit substantially. It is, quite simply, the very definition of win-win.

Price fairly and avoid free riders

A couple years ago I decided I wanted to buy a TV. My roommates had varying levels of enthusiasm for this idea. Further, two of them couldn't care less about the difference between 720p and 1080p. I, on the other hand, have some sort of disease, and not only couldn't stomach the thought of getting anything less than 1080p, but thought it would be practically wasteful to not get a PS3 with the new HD set for watching Blu-rays (I acknowledge this is a shortcoming of mine as a human being).

So, we were at a bit of an impasse: Both groups preferred not buying a TV over spending as much (or as little) as the other thought appropriate. Socializing the costs evenly across all the roommates would have been unfair, as would my paying for the entire TV, since it was to be placed in our communal loft, and all acknowledged that they would use and benefit from it.

Purchasing a TV as a group has other challenges, too. For instance, who takes it when one or more of the roommates moves out? Does one buy out the other roommates' shares? If so, how do you price a depreciated share of a television?

We side-stepped all these issues by devising a simple pricing structure. First, I found the entertainment system that I wanted to buy (i.e., the least expensive one that met my minimum requirements). Then my roommates determined how much they would spend on a TV, assuming we were all going in equally for a set that they actually wanted. Finally, we agreed that they would contribute a little less than this amount of money to the purchase and that I would own what we bought, since I was bearing a disproportionate share of the cost, and yet we would all have equal access to a better set as a result. Thus, I bought the TV and they essentially bought time-limited partial ownership rights to it.

In the end, we all got what we wanted, at prices below what we thought it was worth.

Exploit diversity

One of the reasons markets are wonderful is that there are a great diversity of human preferences and skills distributed throughout the population, and markets let people trade goods and services based on these differences for mutual benefit. So, some people find cooking after a long day of work relaxing. Others, like me, find it draining and would prefer to spend our precious free time doing other things, like blogging about how much they don't like preparing food.

My typical solution to this problem has been to go out to dinner. Every night. This is wonderful -- I get tremendous variety, excellent food, and there's virtually no preparation or cleanup time. It has one major drawback, though: It's expensive.

A couple of my roommates, on the other hand, actually enjoy cooking dinner. They spend time planning meals for each week, buying ingredients at the Food Coop, and doing a series of foreign tasks which result in tasty food in what I'm told is called our "kitchen" (I'm exaggerating a bit here, as I in fact made Indian food just the other night).

By now you should see where this is going. We're presently discussing how best to design a system in which I'll buy weekly meal shares. The marginal cost of cooking for an additional person will be small, and thus even after adding a (well-deserved) premium on top of this to account for the labor involved in preparing the food, I'll still be able to get high-quality meals at prices below what I'm paying in restaurants (and my roommates will have more money in their pockets).

I could go on with other examples -- for example, how we priced each of our shares of rent for our apartment (which is a blog post unto itself) -- but I think you get the point: There are a surprising number of opportunities to trade more efficiently with friends and which leave everyone better off.

But that's only half of my point. The other half is that trade brings people together and actually strengthens relationships.

But Nick, I hear you saying, the causal relationship runs in the opposite direction. It's not that you trade with your friends and therefore have good relationships with them, it's that you have good relationships that make such trade possible. I actually think this point is right, at least partly, because I fully acknowledge that what I've described above does require existing positive relationships. But I think the causal relationship and dependency go both ways. Trade requires trust, but it also builds it.

But there's another advantage of explicitly negotiating transactions like this: It puts everything out in the open and ensures everyone is aware of and comfortable with the terms. Much of the tension and conflict I see or hear about from others' experiences living with roommates comes from a lack of this transparency and clarity. Miscommunications and misunderstanding can slowly breed resentment, frequently about petty and trivial things.

The other retort I expect to hear is that reducing relationships to financial transactions is cold and cheapens the idea of friendship. This is nonsense. First, I'm not proposing reducing all aspects of friendships to defined financial transactions, just a few. Second, in all the cases outlined above, everyone involved was left better off as a result.

There's one more advantage to dreaming up and experimenting with these ideas: It's fun. And that's undoubtedly good for friendships.