I was having a conversation with a colleague about “value” and what the financial “industry” does that creates value. I realized that he and I didn’t agree on the origin of value. He believed that value is defined by the consumer, and that whatever someone will pay for is inherently valuable. I believe that value is defined by need

– so that things that are universal needs (food, clothing, shelter, health, etc.) have a different value than things that are a means to an end (transportation, information, means of production, communication, etc) and yet another difference from things that are leisure or luxury (travel, entertainment, beauty, vanity, etc). How you position things in these value categories is dependent on your worldview. I like to think of what would still be valuable after an apocalyptic war (yes, I was a youth in the seventies) certainly the first category and maybe some of the second category – not so much of the third. I call this concept, “essential value”. Interestingly enough, profitability appears to be inversely proportional to essential value. If everyone needs it, and there is ample supply, there is little or no profit. Profit comes from limitations on supply or an increase in perceived value.

What we have convinced ourselves is that “the market” is the ultimate determination of value. Then we expend crap-tons of effort convincing “the market” to value our product higher than a simple comparative analysis would yield. We appeal emotionally to pride, vanity, tribal identity and other “drivers”, to increase demand for our product or service. But it really doesn’t matter because the leisure/luxury products don’t have any real value (there is no comparative valuation), and we tend to buy what we can afford. The means to an end products and services, end up getting tweaked by emotional appeal, so we feel that we “need” to spend a $60k for a car, instead of riding the train or the bus. Even basic needs are oversold, as we can spend $200 for dinner (although prepared foods service I would always consider a luxury) – the point being via marketing and emotional appeal we forget the value that derives from utility and get hooked by emotional appeal.

The value that derives from utility – This is where it all starts. Essentially, the value that derives from utility says that one 5 passenger vehicle that can haul 4 full size suitcases in a trunk is worth the same as another. Provided they both get the same fuel economy, and they both cost the same to maintain over some rational period of ownership. Thus a BMW 5 series has a similar “utility value” as a Toyota Camry, but an “emotional value” that is twice as much. A 100% cotton pinpoint oxford shirt at Kohls has the same utility value as the same shirt at Brooks Brothers, but an “emotional value” of less than 20%, and 30% of the emotional value of the same item at L.L. Bean. If we measured our economy in terms of “utility value” rather than “emotional” or “market” value – we would be surprised to see how much we actually pay for “feeling better about ourselves”.

This analysis is completely unscientific. It does not consider established financial principles. It does resonate for me, though. In the U.S. of A. we are so stinking filthy rich, that we spend more money each year on feeling good about ourselves, than it would take to end world hunger 3 or 4 times over. We spend more money on Baseball each year than it would take to end world hunger. What really is Baseball anyway? Is there any value in Baseball? No not really. Because leisure activities have no utility value. How unAmerican of me to say that Baseball has no value. In fact, like most entertainment products and services, it is a negative – a distraction, an escape – a way to avoid ourselves. And that is really part of it, isn’t it. We spend money to live vicariously through someone else’s exploits – the lead in an action movie, a sports figure. We spend money so that others can tell us what to think (comedians, poets, authors, movie producers) because it is easier than thinking for ourselves. We spend money to escape from the truth that our lives produce little of lasting value, and that which we do produce appears to be slipping away faster than we can hang on to it. We find ourselves “upside down” meaning that we owe more than we own, and we don’t know what to do about it.

So on a serious note, I want to ask you a few questions:

How do you feel about that?