How much is it worth?

When we are considering a purchase, we often look at the pricetag on the product or service and ask ourselves, 'Is it worth that much?' We may even ask the salesman, 'What do you think about it?' What we are really trying to gage is the value inherent in the product or service and whether or not it justifies the proposed price. Ideally, of course, the price should reflect all the attributes of the product or service in order to give us an object measure of its worth. However, we still find ourselves questioning the price. Why do we do this? Because the question we are asking isn't really, 'How much is it worth?' Rather, the question we are asking is, 'How much is it worth to me?'

All of us have a different measure for the value of any given product or service because each of us differ in the factors that determine value. We all differ in 1) our inclinations and 2) our financial ability to satisfy them. Therefore, the equation that determines the true worth of any given product or service for any given person is:

Value=Purchasing Power+Personal Preference

It doesn't get much simpler than that. If price were to truly reflect the worth of a purchase, everyone would have to have the same desires and the same amount of money.

First, the amount of money a person has to cover the proposed price significantly affects whether or not the product or service is worth that much to that person. Generally, as a person's income increases, the worth of any given product or service to that person also increases. Worth and income, therefore, are positively correlated. Let's give an example of how purchasing power plays into a purchasing decision: There are 2 people purchasing vehicles. Both would settle for a 2010 Honda Civic EX, priced at $20k, but would prefer a 2010 BMW 750, priced at $80k. Person A makes $20k per year and Person B makes $80k per year. Below is how each makes his purchasing decision:

Person A: $20k/yr => BMW is $80k (4 yrs) => Honda is $20k (1 yr) => settles for Honda

Person B: $80k/yr => BMW is $80k (1 yr) => Honda is $20k (3 mos) => buys BMW

Why does each person make a different decision, given that the prices and preferences are identical? Because, clearly, Person B has greater purchasing power than Person A. It takes Person A four times as long to be able to afford the BMW than Person B. As a matter of fact, both Person A and Person B value their vehicles at one year's worth of labor. Thus, as absurd as it may sound, one could say that the Honda is worth just as much as the BMW...because the Honda is worth just as much to person A as the BMW is to person B.

Let's change the scenario a bit and look at it from the perspective of personal preferences. Suppose, again, that Person A and Person B both prefer BMWs to Hondas, but one thing changes in the outcome. The purchasing decisions are as follows:

Person A: $20k/yr=> BMW is $80k (4yrs)=> Honda is $20k(1yr)=> Buys BMW

Person B: $80k/yr=> BMW is $80k (1yr)=> Honda is $20k(3mos)=> Buys BMW

In this scenario, Person A buys the BMW regardless of the cost because Person A prefers BMWs that much more than was the case in the first scenario. Thus, in this scenario, though both Person A and B are making the same purchase, the purchase is worth four times as much to Person A as it is to Person B. The BMWs, in this case, have different worths.

The point of this exercise is demonstrate that neither Hondas or BMWs have inherent value. Ipods are worth no more than Walkmans. Starbucks is no better than Folgers. In fact, terms such as 'value,' 'worth,' and 'better' are meaningless without being applied to some subject. Nothing has intrinsic value. A thing only has value if it is valued by someone; it only has worth if it is worth something to someone. Things that are objectively valuable are simply valued by a lot of people or exceptionally valued by a few. Things are worth whatever we want them to be worth.