Maxim 3: Value is Subjective

The nature of value is subjective to every person. This means that the value of something will mean differently to each individual. That something can be anything include goods, services, experiences, people and more.

For simplicity’s sake and easy understanding, value would be underlined from the frame of a business perspective though it can be applied on anything in our lives.

According to the Wikipedia entry on value:

The subjective theory of value is a theory of value which advances the idea that the value of a good is not determined by any inherent property of the good, nor by the amount of labor necessary to produce the good, but instead value is determined by the importance an acting individual places on a good for the achievement of his desired ends.

In short, it is the buyer that determines the subjective value of something. However, that is not usually the case. In that, the seller then does the utmost to influence the perception or perspective of the buyer to frame the value of that something in the highest regards if possible. Thus, the seller profits as much as possible from the transaction while the buyer feels as emotionally validated as possible with their purchase of the goods, service, experience or more.

While economics explains that consumers make purchases in a rational and logical manner, in reality people can be just plain irrational with their purchases due to emotions and psychological reasons.

“Price is what you pay. Value is what you get.”
Warren Buffett

Never is it more evident with the Paradox of Value (Diamond-Water Paradox) found in economics. This is Wikipedia’s explanation on it:

The paradox of value (also known as the diamond–water paradox) is the apparent contradiction that, although water is on the whole more useful, in terms of survival, than diamonds, diamonds command a higher price in the market. The philosopher Adam Smith is often considered to be the classic presenter of this paradox, although it had already appeared as early as Plato’s Euthydemus.

In reality, diamonds are only valuable because you have been socially conditioned to perceive it as valuable. If one were to actually think about it, diamonds are just shiny rocks. That’s it. Thus, you will be paying exorbitant sums of money to acquire a shiny rock. Think about it.

That which we obtain too easily, we esteem too lightly.”
Thomas Paine

Even more vexing is that, when we have purchased the diamond with that huge sum of money, we feel even better about it because that is the worth we have exchanged for it, thinking it is an equal exchange. Pushing aside the veils of unreasoning and our bias, do you actually think its worth it now?

Now, assuming the same diamond is priced at a lower price. People would actually feel less good about their decision to purchase it compared to a higher price. Now, isn’t that ridiculous?

“Nowadays people know the price of everything and the value of nothing.”
― Oscar Wilde 

Now, considering all of the above and the quote by Oscar Wilde, let’s think about it for a moment. Isn’t it so ironic that some of us have the inability to distinguish the value of anything without a price-tag?

For instance, there are things that are beyond priceless and valuable such as our sense of sight, the ability to work, earnest friendships, family, love, health, peace and more? Perhaps even the small comforts in life we take for granted, where in reality those small comforts are so much more valuable than the most expensively priced items in the world. The food on our table, the home we live in, clean running water, a bed to sleep in, a computer with Internet connection and more.

Knowing this, we can be more aware of bias and consciously act differently.  Firstly, you have to reevaluate your frame of perception or perspective towards anything in general. In essence, you have to ask yourself what truly matters in your life and realize that there are some things in life we can live without. Besides, the items we own do not define us. Rather it is what we think, feel and do that actually defines our identity and meaning in this world.

Second, you have to distinguish the real value against the cost or effort of acquiring that something. How does this item give value to you and in what way?

By doing these two actions, we’ll be able to receive better value against cost while  truly enriching our lives not just in terms of wealth but in all aspects of life.

Till the next time.