Okay guys, I’ll cop to all the other misbehavior, but not this one. I still don’t know the true value of a dollar and don’t think anyone else does either.
In fact, the more I’ve look into it, the more elusive value is as a concept. Certainly, we can see prices fluctuate by the minute on Wall Street, but it goes much deeper than that. We’ve evolved for survival, not optimization and that has left our emotional circuitry with some funny glitches when it comes to dealing with modern society.
The dollar auction
Back in the early days of game theory, a parlour game became the dollar auctionbecame a a minor craze amongst mathematicians and economists. Here’s how it worked:
Everyone would sequentially bid for a dollar. The winner would have to pay their highest bid and so would the runner up. The players might start out at a penny, hoping for a big return, but as the game went on bids would eventually exceed a dollar.
How could that be? Who would be dumb enough to pay more than a $1.00 for a dollar?
The answer lies in a quirk of rational choice theory. Each player was maximizing gain and minimizing loss at each point in time. So if your opponent bid $0.10 it made perfect sense to bid $0.11, because you would win a dollar and only have to pay $0.11 – a gain of $0.88.
However, the same logic would hold for your opponent bid $1.01 while you bid $1.00. Certainly, at that point, it’s better to bid $1.01 and lose a penny then to pay the runner up penalty of $1.00 and receive nothing. Just as it would behoove you to then bid $1.02.
Sometimes the only way to win is not to play.
Ultimatum game
This time how about I just give you a dollar, but with a catch. You have to propose a split of your winnings with someone else and if they reject your proposal, I take the dollar back. How much would you share?
This experiment, called the ultimatum game, has been reproduced hundreds of times. In industrialized societies, people usually propose a 50/50 split and offers of under $0.30 are usually rejected. However, in other cultures, offers could range from over $0.50 (and even then rejected) to nothing (and accepted).
Obviously, something more than money is being valued in seemingly routine transactions and that’s probably why my parents paid so much attention to how I dealt with money. They wanted me to adopt certain cultural norms that they saw as essential to functioning in the society in which they were raising me.
If I spent all of my money on candy and comic books, they were worried that I was too superficial to be taken seriously. If I gave all my allowance to charity, they might be encouraged that I was displaying values that they aspire to, but nervous that I might not be equipped to deal with the realities of a harsh world.
How we value money says a lot about how we value other things in life.
Brand promotion and the discount paradox
We’re all fish out of water. We evolved to survive in small tribes in a world of scarcity and find ourselves living in large societies of relative abundance. We are therefore much better adapted to making quick decisions based on subtle cues rather than pondering over lengthy rationalizations.
This effect plays out in strange quirks in consumer behavior. Evidence suggests that we often use monetary value as a clue to quality and efficacy of things we buy. So we actually get less from discounted goods and more out of branded products. In other words, how products are marketed affects their performance.
It’s hard not read the previous paragraph and say, “That sounds incredibly stupid. I ‘m more sensible than that!”
However, we all do it. We deal with many things in the course of our lives and we atttain expertise in very few of them. So it’s reasonable, necessary even, for us to take shortcuts and those usually take the form of cognitive biases such as price signals. Our perception of value then affects subsequent experience.
In truth, we have much less control over our beliefs then we’d like to admit.
Bounded rationality
As professional life is getting more data intensive, there is a growing tendency to over-optimize. A “show me the numbers” approach can skew our judgments toward what’s easily measurable and often ignores more subtle conceptions of value.
A great historical example is former Coke CEO Doug Ivester’s plan to modify vending machines so that they would charge more for beverages during high demand periods, such as hot days, and less during low demand times. The result: disaster. Consumers were up in arms about price gauging.
It’s a curious case, because as this article points out, variable pricing is fairly common in many product categories, such as airline tickets. We seem to be willing to pay for changes that limit supply rather than those that increase demand, even though the economic effect is the same.
Emotive value
What’s interesting in all of this is the extent to which value is an emotional calculation rather than a rational one. It’s not something we compute as much as something we feel.
People at an auction will often pay far more for an item than anyone would dare to charge them. Seasoned corporate executives continue to overpay for acquisitions even though they are aware that most fail.
In a particularly famous case, the Board of RJR Nabisco took a lower offer rather than give their CEO, Ross Johnson, a payday they saw as excessive. Financial transactions have a strange way of becoming moral litmus tests.
And that’s the paradox of value. It’s contextual rather than absolute, reflexive rather than intrinsic, but it is value nonetheless.
Greg Satell is a blogger and a consultant at the Americal online media Digital Tonto. You can read his blog entries at http://www.digitaltonto.com
