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• Chanel Leyva

# What is the value of something?

First off, value is subjective. Everyone will place different values on different things, depending on such things as personal preferences, their economic status and income, and thoughts about the future such as expected future income and wealth, and the future worth of the item. Your reservation price is the highest price you would theoretically be ready to buy or sell something for. This may or may not correspond to the actual price you would be getting on the market.

If the price of the product is lower than your reservation price (P>Pr), then the difference is your surplus value, which is what you gain beyond what you think the actual value is. For example, on the market for goods, let's say that the price of a good is \$100. Your reservation price is \$110, so that means that you think the product is worth \$10 beyond what you pay. The total value to you, is \$110. On the other hand, the seller's reservation price is \$90 – i.e. the seller would be ready to let go of the product for that amount. On a very efficient market, that price might be what it cost to make the product. So \$90 is the value of the product for the seller. \$100−\$90=\$10 is the surplus value for the seller, if it sells for that price.

If your reservation price is \$100 to sell something, but the best offer you can find is \$90, then you should distinguish between the personal value that you attach to the product, and the market value. In the public world, we usually value things by its market value. So if \$90 is the best offer you can find, then that is its fair value.

This assumption means that a building that cost \$1 million to build, can actually be worthless (\$0) on the market if nobody wants to buy it. This could of course change in the future, perhaps people will get around to see the value you see, with time. So how is it that a building can be considered completely worthless, even though it's "obviously not"? Well, it can also be said, from a more financial perspective, that a value of an asset is worth the future income that it will provide. So if the market doesn't believe that the asset can create future income, then it's basically of no use. In market crashes, fear may drive investors to undervalue assets, or simply not be willing to engage in transactions at the time, driving prices down.

We can create a measure of something's value by calculating its present value. Typically, the formula would look something like:

PV=FV(1+i)n

where FV is the future value (what you can sell it for in the future), i is the best alternative rent you would be able to get per period during that time (e.g. by investing in a risk-free bond), and n is the time periods until payment. The formula discounts the future value to give a comparable present value, that you can use to compare it with other investments. (1+i)n is the compounding effect of the rent over time.

So let's say that you own a nice painting, and you think that it will be worth \$500 in 10 years. Given that you could sell the painting today, and place the money in a bank account which pays i=1% per year in interest rate, you should be willing to sell it for \$500(1+0.1)10=\$193 today, meaning that you either can get \$500 by selling the painting in 10 years, or the same money in 10 years by selling it now and keeping the funds in a bank account until then. Again, market value is what should be used here to value the asset in transactional terms. But for you personally, the painting may be worth more than \$193 because it brings pleasure looking at it every day. In that case, you might actually value it in such a way that you would rather keep the painting for 10 years, rather than sell it now.

I found this to be an interesting article, as I'm always into the psychology of things. What's even more interesting is the talk i just heard on a podcast not too long ago that talked about the manipulation big brands use to keep you a long term customer. One thing we all do that completely makes no sense, is buy the name brand item simply because of its name. Simply because you recognize the name from a commercial maybe or possibly the late night news or even better, because its more expensive (it must be a name brand or something important if its so expensive)

Business gives Estimate but instead of putting the price they want (lets say 5k) or should be getting, they tac on 1k dollars asking for 6k (example only)

Potential Customer receives estimate and emails, texts or calls Business to give some sad story about how they want to sign with you but right before you gave estimate they had "such and such" happen and that took all their money and now they can only spend 4500 dollars

Business replies, "Well, I cant do 4500 but i can do 5500"

Potential customer replies, How about 5k?