Pawn shops

Let’s say you want to buy a trinket from a pawn shop and sell it to someone else. In most cases, you aren’t going to be able to find a price equal to what you paid. The “spread” on your trinket is the difference between what you can sell it for (say, $10) and what you can buy it for (say, $20).

The pawn shop owner, Jimmie, knows exactly how much the trinket’s worth - 15 bucks. Note that the value of the trinket is always somewhere between the bid ($20) and the ask ($10). This bid-ask spread is a measure of the liquidity of the market, essentially the “price you must pay to “liquify” an otherwise illiquid asset.” [1]

The “tick” in our pawn shop example is probably 25 cents. In your negotiation, you can probably offer $19.75 instead of $20 for your trinket. But you probably can’t bid $19.99 instead of $20. The one cent isn’t worth it, and he’ll smack you if you ask again.

Unfortunately the “tick size” means that you might be overpaying for your trinket. The value of the trinket might actually be $19.90, but you have to pay $20 for it anyway. Practically speaking you can see this happening when an unfortunate soul doesn’t have enough money to quite meet the bill, and throws a bunch of pennies on the table in the hope that it gets “close enough” to be less than a tick away from the actual value.

Matt Levine has a great take on tick size, if you want to read more. In the finance world, it’s interesting to note that by making the tick size smaller, the market becomes more efficient. Yeah, read that again.

Essentially, if Jimmie’s willing to round to the nearest dime instead of quarter, the spread on your trinket can shrink. That’s good news for both sellers to Jimmie (who get a higher price), and buyers from Jimmie (who get a lower price). But Jimmie, who gets stuck on the wrong side in either deal, misses his boat payment. You can be sure that pawn shop owners won’t negotiate to the penny anytime soon.

One other thing - the size of the tick depends on which market you’re in. Equities have a certain tick size, bonds have a different one, and so on. But as we’ve seen, financial markets aren’t the only place this applies.

Now let’s talk about lawyers. Lawyers sell a service, rather than a physical good, but the way they bill for their time has a lot of similarities to our pawn shop.

Most lawyers bill at an hourly rate, and they also have a tick size - some lawyers bill to the nearest quarter of an hour, but most bill to the nearest tenth of an hour. A lawyer that bills $250 / hour therefore has a “tick size” of $25.

A couple of things to note:

The first is that you can’t simply hire a lawyer for a single tenth of an hour. Most attorneys have some fixed amount of stuff that you need to purchase from them before they bill you this way - i.e. buy 10 hours worth of my time, then I bill in increments afterwards. Pawn shops have a similar setup - there’s a minimum price for everything in the store, and you can be sure it’s not a quarter.

The second is that there is a cost associated with billing at smaller increments. Namely, it’s way more annoying to track your time every 6 minutes. It wasn’t worth Jimmie’s time to bicker over pennies, but it actually costs lawyers time to track their hours, and that cost sets a lower limit on what the tick size can be. Finance doesn’t really have this problem…the tick size is whatever the exchange says it is, and it can be lowered (or raised) relatively easily.

Step functions

Ultimately that means that any time you sell something, the price to value function is not a continuous one, it’s stepwise. That is, you to have to sell some discrete additional value before the price goes up, and the price can only go up in increments.

But most of you aren’t lawyers, and probably very few of you have gone to a pawn shop recently. Who cares?

Actually the service I sell most often is time to my full time employer. And that service is stepwise too. In fact, to a first approximation, there are only two ways that I can sell my time to most employers:

  1. Working as a fulltime employee, 40 hours a week, 48 weeks a year.
  2. Not working as a fulltime employee, 0 hours a week, 0 weeks a year.

The standard of 5 days a week & 8 hours a day is totally arbitrary, apparently negotiated by labor unions 80 years ago. But that’s the market. And due to the nature of this market, I can pretty much only sell (1) to at most one employer at a given time, and have to put all other employers in the (2) category.

Now all those inefficiencies about tick size aren’t just some intellectual horsepuckey, it’s now how I make my living, and the tick size is a mile wide, and no one’s talking about it.


Keynes hypothesized that by now, people would be working 15 hours a week, because the average worker productivity would continue to go up, and people’s needs would long have been met with just that:

Thus for the first time since his creation man will be faced with his real, his permanent problem-how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well.

For many ages to come the old Adam will be so strong in us that everybody will need to do some work if he is to be contented. We shall do more things for ourselves than is usual with the rich to-day, only too glad to have small duties and tasks and routines. But beyond this, we shall endeavour to spread the bread thin on the butter-to make what work there is still to be done to be as widely shared as possible. Three-hour shifts or a fifteen-hour week may put off the problem for a great while. For three hours a day is quite enough to satisfy the old Adam in most of us!

That’s within sight right now! Many of the people I know in tech are making more money than they need. Some have turned to donating altruistically, others are obsessed with retiring early.

I think I like having a regular job. There’s something satisfying about chipping away at an important problem, and I like being paid for it. But I would prefer to scale my work time in accordance with my needs. As in, I should be able to work for 3 days a week, and get paid 60% as much. Or in lieu of a 20% raise, I simply don’t work on Fridays.

But I can’t do that! Instead, I need to have a tough negotiation with my employer about salary where my needs are met with less than they are already paying me, but other employers pay more, so they need to pay me more.

Employers are effectively paying me in both time and money. Almost everybody in tech gets 2 days a week off, some salary X, and some equity Y. I simply want to convert the constant “2 days” into a variable which can be adjusted like the others.

Unlimited vacation

Some tech companies have a policy called unlimited vacation, the idea being that you can take as much time off as you want, and everyone will be happy.

I’m surprised nobody calls this out for the outright lie that it usually is. With a couple of notable exceptions, I can’t think of a single person who has successfully pivoted their unlimited vacation policy to working 4 days a week. Since that converts to about 1.5 months of vacation, it’s clear there’s some kind of cap.

These vacation policies were only put into place after someone did the math and realized that the average employee will not take the standard amount of PTO. That’s especially the case if you force them to ask for it by the day, and have them face the social pressure of the rest of the team not taking that much time off.


I know what you’re thinking - Sanjay forgot to talk about contractors. No, I didn’t. Being a contractor is great because you can in fact set your price and your time commitment to be anywhere you want, including within the tick size of being a full time employee.

The problem is that contractors, by definition, can provide end-to-end value completely by themselves. And I can’t, at least not yet. That’s why an Uber driver can be a contractor - all they need is a functioning vehicle and an iPhone and they can provide discrete value. But the value I can provide is much closer to the cog that gets lots of other cogs to run faster / more efficiently. I’m valuable within a system, not an end to end system on my own. I suspect that most white collar employees are in the same situation as me.

And while it’s very possible for product managers or developers to work as contractors, you hit the same problem that you hit in any other illiquid market - there’s not a *ton *of buyers, so you tend to rely on the same few folks every time you sell your services, which means you may not be getting market value for your service. Sometimes, if you’re really good at selling, this can be to your advantage. Other times, it won’t be.

There’s nothing special about a 40 hour work week. We even have some evidence that workers are not as productive working 5 days as 4 days (though in that case, it was the same number of hours). There could be a Laffer curve like effect on efficiency, and companies today may be on the far right side of the curve.

[1] Thanks to Andrew H for this excellent explanation and broader feedback on drafts of this article!