(The Truth About Value #3) The ultimate formula for "to buy or not to buy"

It really exists?
First, imagine there is a secret formula hard-wired in all of us that dictates whether we buy or not to buy something. What would be the formula?

Second, do you think such a formula even exists? Could we all possibly have the same logical equation programmed or indoctrinated in us?

The Formula
Let me explain my model, which is really very simple.
We have to use our earlier assumption in Truth #2 that every individual has his own valuation of money.

So suppose Joe walk into a supermarket, when do Joe put items into his shopping cart? When Joe picks up an item to consider, he will "read" the product to understand its attribute (e.g. contents, packaging, manufacturer, etc), consider his own needs and mentally assess the product's value to him. He will buy when V(Product) > V (Price). ie. his valuation of the product is greater than his valuation of the money required to buy it. If the equation is positive, then there is value-add in his buying action. He "creates" or gains value of V(Product) - V (Price). Its that simple.

If Joe has a fixed shopping budget to spend on, then he will be trying to find the collection of items that maximises the total value-add: T[(V)Product - V(Price)].

While V(Product) > V (Price) seems to be a static equation, it is actually a very dynamic one that fluctuates with changing circumstances and perception.

Valuation against needs
Note that Joe's valuation of things changes over time depending on his needs. Imagine how much would he value a toilet (and willing to pay for it) when he runs into desperate stomach trouble? At other times when he does not need it, his valuation will be zero and he would not use it even if its free. How much more would he value a good meal when he skips the last two meal times? How much less would he value a movie at the cinema after watching it once? Our needs change from time to time and so do our valuation of solutions, i.e. V(Product) that solve those needs.

Valuation with more inputs
In addition, his valuation of products also change with more inputs. His friends may have given him good feedback of a newly launched golf set. Or he may have watched Tiger Woods win a tournament with it on TV. Or read rave reviews of it in magazines. Or he may be influenced by product advertisements. The job of a markeeter (through branding, advertisements, endorsements, packaging, etc) is merely to increase your valuation of their products. With more inputs, V(Product) will again increase or decrease as a result.

Valuation of money
As discussed in Truth #2, an individual's valuation of a unit of money is dependent on his wealth (absolute or perceived). If, for instance, Joe just got a pay raise or collected a huge annual bonus, then his V(Money) will decrease. At this point in time, Joe's V(Price) of numerous products and services will fall below the respective V(Product) and he will be more tempted to buy these things, which has become relatively more affordable.

Does this resonate with your own behaviour and your observation of others'? Think about this next time you have an urgent urge to buy something.

Is it because:
- Your needs for that thing has increased or become more urgent [V(Product) increase]?
- You have received more positive inputs about the product [V(Product) increase]?
- You feel wealthier for various reasons [V(Price) decrease]?
 - There is a discounted sale of the product [V(Price) decrease]? More accurately, its V(Decreased Price).

Whichever, the change in circumstances and the variables has just turned the V(Product)>V(Price) equation from negative to positive, increasing your tendency to buy.

(The Truth About Value #2) How we value money

An important fundamental in the study of value is how we value money itself. This is critical because money is the main medium of exchange and our valuation of money will have major implications on our behaviour in buying and selling things. Money is a funny animal because while it is a "storage of value", there is also a premium, on top of the stored value, attached to holding it (see Why we value money below).

Here are two rules of thumb:


- In general, the more money we have, the less we value each unit of money (can be any amount, say $1, $10, $100, etc). In economics, the Law of Diminishing Utility says that the marginal utility from consuming one unit of something is less than that of the previous unit. Applying to the concept of money, it means we value each unit of money less and less as we have more and more.

For sake of illustration, suppose we have a hypothetical universal currency called V (value units) that is an individual's own universal valuation of things and money. When Peter has a wealth of $100,000, he values $10,000 at V100. One year later, when his wealth increases to $1 million due to winning a state lottery, he will value $10,000 much less than V100, say V20 or V10. Similarly, two people with different wealth levels will value one unit of money differently. It has been said that if Bill Gates sees $1,000 on the ground, it will not be worth his time (assuming it take 4 seconds) to pick it up because his opportunity costs is $300 per second (from 1975 to 2000). But for the rest of us, that will be a lot of money for a few seconds work. Because we value money differently.

- In general, the less we value money (per unit of money, can be $1, $10, $100, etc), the more we will exchange it for (i.e. buy) things. When the relative importance of money goes down viz-a-viz things, the relative value of things goes up. Hence, our tendency to buy increases.

Just imagine that money is a the predominant currency (just like US$) and different things are other currencies. So when US$ goes down, the other currencies goes up in relativity. Alternatively, say George originally values $1,000 at V50. He got richer and is valuing the same amount at V40. There are Thing A and Thing B which he values at V45. Earlier he would not have bought it, but now he will rationally exchange that for Thing A and Thing B, since he will be able to gain V5 each now.

In totality, the two rules of thumb combines to explain why when we get richer, we tend to buy more things or more expensive things. Vice versa. When we are more well-to-do, we become more willing to pay for luxury goods and wellness services.

Why we value money

People value money for 3 main reasons:
1) It is a liquid and freely accepted medium of exchange and storage of "things". This is the basic value.
2) By itself, holding money provides mental and spiritual well-being as it means that we can trade it for many things we value in the future. This is the premium value.
3) Money is a good "plant" to farm. Nurture (i.e. invest) it well  and it will grow in abundance. This is the premium value.

For all three reasons, we can easily postulate that the more we have, the less we value each unit of money.

(The Truth About Value #1) Value add or value minus?

For any activity that we do, we can either add or minus value. There are value-adding (VA) activities and value-consuming (VC) activities.

VA Activities
Value-adding activities are those undertaken to increase the usefulness of Something; e.g. cooking (adding value to raw ingredients), farming (adding value to seeds), transporting (adding value by bringing goods closer to consumer), product marketing (adding value to products by raising consumer awareness of benefits). To differentiate the various types of value-add (or minus), I would call the above as Product Value-Add activities, because value is added to Something.

VA Activities Can Destroy Value
Another form of value-add is Process Value-Add, which is whether there is net value gain or loss in the VA activity.

Process Value-Add occurs when New Value (NV) > Original Value (OV) + Cost (C). On the flip side, Process Value-Minus means that the NV is less than the C (direct cost + an individual's effort) and OV combined (i.e. output less than inputs). When this happens, value is destroyed on a net or process basis. If, concurrently, NV > OV, then there is both Product Value-Add and Process Value-Minus. This can be liken to revenue increase (gross basis) and profit decrease (net basis) happening at same time.

Examples:
A - Peter is to deliver a parcel worth $10 to a recipient. His delivery costs (including gas and personal time cost) is $5. The recipient, who is also the consumer, only perceives the value of the parcel as $12. Hence, this delivery is a Process Value-Minus activity (-$3), even if Peter added $2 value to parcel (Product Value-Add). In this case, NV > OV.

B - Jessica bought a beautiful necklace for $200 as a birthday gift to Vanessa. Vanessa already has a similar looking necklace and has too many necklaces anyway. Therefore, she only values it at $150. Hence, Jessica's act of giving destroys value of $50. NV < OV applies. Both Process and Product Value-Minus occur.

In daily or business life, it is useful to analyze whether an activity is Value-added or Value-minus, process and product-wise, so that we can consciously decide whether to do it or which activity to prioritize. A lot of what we do are actually Process Value-Minus (Example A) or worse, Product Value-Minus (Example B), after factoring in our time/opportunity cost. Consideration has to be given to hidden variables such as NV and C to get the true picture. In business, if there are too many activities which are value-minus or if the collective process is value-minus, a firm with limited resources will struggle to turn a profit and survive in the long run. That's why the last decades of process improvement, applying lean and six sigma techniques, have been about removing non-value adding steps, such as waiting, rework, errors and eliminating excesses.

VC Activities
VC  activities consummates the output of the value creation process. Both (VA and VC) hands are required for clapping to take place. They are the opposite ends of an equation. VC is the step to realise or "encash" the value, which should not be confused with destroying value. There is no meaning in any VA activities if there is no VC at the end. Unused waste happens when there is no VC.

Examples:
A - Jenny cooks dinner for her son, Bill everyday. Unfortunately, Bill skips home cooked dinner frequently to dine with his friends outside. Unused waste happens as the excess food is thrown away.
B - In business, products are designed, produced and marketed before any consumers buys it. If some goods remained unsold and are throw away then unused waste happens. Zero value realized.

In theory, all VA activities should start with analyzing and measuring VC, from the consumer's point of view, rather than the producer's. This process, known as market research or testing, can be done at the aggregate level at a large scale or individual level at a smaller scale. Although easy said than done, we should always start with an end in mind and try to at least minmize unused waste, from an environment and economic point of view. Creating unused waste is worse than VA activities that destroys value, as some value is at least consumed in the latter.

VC Activities that Maximize Value

While VC activities do not create value in itself, the right consumer and right application can maximise its value. For the value producer, whether business or individual, the key to maximizing utility is to deliver the products / services with right attributes to different consumers (customizable products), or with the fixed attributes (standard products) to the right consumers. Fundamentally, it means to serve someone in the right way or to serve the one way to the right someone.

Examples:
- Thomas sells ice-cream in a park all year round. During summer, sales are top-notched and queues are long. However, during winter, customers were few and far between. Across the year, he struggles to breakeven. Theoretically, in order to succeed, he has two choices. First, to make his products customizable by selling ice-cream during hot seasons and hot soup during cold ones (customizable products). Alternatively, during cold seasons, he could shift his ice-cream business (standard product) to the opposite hemisphere, which would then be summer. Either way, more customers will pay for his products which are delivered in a format that enables value maximization of the consumer.

While the ideas presented above are not rocket science, I believe these notions that are fundamentally programmed in our brains to help our decision-making, usually unconsciously.  It is merely that we have not yet developed the language and semantics to articulate these ideas in a layman form. For instance, I have not come across the term "value-minus", although it is a crucial part in analyzing our daily and economic behavior. Let's get started.

Value creation is the FORCE driving all economic activities

Human behavior is motivated by the intrinsic urge to create value for oneself and others. From our most ambitious plans to mundane daily activities, we are guided by this hidden, yet most powerful urge. The basis of human survival, improving livelihoods and growing wealth is to create value and exchange it for something of comparable value or for money, which is the storage of value. In fact, this behavior is so innate that even other species, those who lived in groups, behave. Imagine an army of ants and swamp of bees, where each member plays a specific role to create value for the whole and to be taken care of in return.


Since our most primitive days as a species, our primary activities of hunting, gathering, farming, building shelters, seeking safety and nurturing families are all value motivated. We source for and grow food that is necessary to nourish our bodies and build communities for safety and for better economic efficiency from division of labor and economies of scale. For survival and success, in the long run, we need to create more value than what we consume. Else, we will be in debt of others.

Value is created everywhere and all the time, whether money is exchanged for not. We exchange value for stronger relationships with people we are related to and trade value for money with others. Money is not what makes the world go around. Value is. Money is the distorted, and often missing shadow of value. Alvin Toffler, in his Revolutionary Wealth book, termed this "missing shadow" as prosumption, where the producer and consumer are the same. On a wider scope, it also means that value is massively created and exchanged without money changing hands, usually in a inter-dependent group setting such as family or community. Because value is intangible and difficult to measure, money is often chosen as the proxy. That has obscured its importance as a underlying motivator for human and economic behaviour.

What is VALUE?

The Definition of the term, Value is surely of utmost importance as it will set the backdrop for our future discussion of this topic. I am not trying to be historically or scientifically correct; but merely to capture the essence for layman usage.

Value (the noun) is a term that has been defined and used loosely in the English language.Value itself has several meanings so let's choose the one we are referring to:

Unit of Measurement
One group of definitions uses Value as a general unit of measurement, especially in Mathematics.
E.g. evaluate or estimate the nature, quality, ability, extent, or significance of something
E.g. a numerical quantity measured or assigned or computed

We are not referring to this meaning.

Unit of Worth
The next group defines Value of a unit of monetary worth.

E.g. monetary or material worth, as in commerce or trade
E.g. the worth of something in terms of the amount of other things for which it can be exchanged or in terms of some medium of exchange.
E.g. equivalent worth or return in money, material, services

This is certainly the most common layman use of the word. We are certainly getting closer but not exactly there yet. 


Something of Usefulness and Benefit 
Finally, we reach the usage most closely associated with economics:

E.g. something (as a principle or quality) intrinsically valuable or desirable
E.g. Value is often measured by the usefulness or desirability of something.Worth of all the benefits and rights arising from ownership.

So, generally economics referred Value, both to a "something" and a "unit of benefit or utility".

For Layman Simplification

For layman interpretation, I will define Value as "the benefit derived from possessing or consuming something of desirability, usefulness or utility". Value is, at the same time, a unit of worth that is used to measure the benefit in both monetary (usually) and non-monetary terms. Hence, I have combined Value and its worth to mean the same thing; just like Money and its measurement are often referred to as one and the same. 


A future elaboration is that the something in question can have two values: One for the storage and exchange of value and another for the value derived from consuming it. Some historical economists referred to the former as Exchange Value (or Price) and the latter as Use Value. I will use Price to mean Exchange Value (similar to Unit of Worth definition) and Value (as my definition in previous paragraph) to refer to Use Value.

With this, we have now gotten the dry part out the way. 

A Blog that is All About Value

This blog explores the world of Value..in perspectives that has never been discussed before... in snippets that will, without doubt, be compiled and published as a book. That is the intent, anyway and this is the opening.


The term "Value" is possibly the most overused and least understood word in the English language. It may well be the most powerful too, because it  is the underlying force that drives human motivation and behavior. All this is not obvious now, but will become self-evident as you read along.

That is the purpose of this blog: to philosophize the nature, importance and power of Value and explore how it relates and can be applied to economics, business, psychology and our daily life.. For the lack of a specialised branch of study in this area that I know of), I will tentatively coin the term Value Doctrine to describe this field of study.

Stay tuned, for regular writings on this mysterious and fascinating topic!