How Many Economists Still Get Subjective Value Wrong

By: Per Bylund
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Subjective value is not objective. Sounds obvious, but the distinction is lost on most — scholars and practitioners alike.

People seem to think subjective value is simply a person’s ‘willingness to pay’ a price. Well, it’s not. Subjective value cannot be expressed in dollars and cents, because that would simply mean subjective value is an expression in terms of objective market purchasing power.

If value is subjective, however, that purchasing power too is subjectively valued, in terms of what subjective value it can provide (through the actual goods and services the money can purchase). And, in any market-like setting, willingness to give up purchasing power for a good only indicates that the person subjectively values that purchasing power (however it is appreciated by him/her) less than the value expected from the good that can be purchased.

Willingness to pay, expressed in the dollars and cents that in turn can command goods and services, only means the buyer expects to be better off from going through with the exchange. In terms of value theory, there may be no connection between the value of that which is forgone and that which is gained in return, other than them being valued differently (the former higher than the latter). 

Scholars should know better than to confuse these things, but they’re obviously quite confused. 

Instead of thinking about the meaning of what they say, they adopt a practical shorthand used to get a dollar amount on a customer’s valuation. This makes some sense from a practitioner’s perspective, where a customer’s willingness to pay for one’s good is a rough estimate of what money price could potentially be charged for the good. 

It’s not accurate, however, which is why entrepreneurship models suggest that entrepreneurs should make sure to charge a price lower than customer’s stated willingness to pay (if it can at all be trusted). 

Also, the actual willingness to pay depends on offering the actual good along with the argument for why it would be valuable for the customer to have/buy it.

In a different time and place, and with different messaging, this ‘willingness’ changes both with how the good is subjectively appraised and with the other opportunities available to the customer. I might value a hamburger, but I value a hot dog more

Consequently, if there are hot dogs my willingness to pay for hamburgers is practically zero; if there are no hot dogs in sight, my willingness to pay for hamburgers may be significant. See how this works?

One’s willingness to pay is not about the [subjective] value of the good itself (that is, the satisfaction experienced, or in any case expected), but is contingent on alternatives available. Practitioners who are careful can gain insights from willingness-to-pay estimations. But it is still a very blunt tool, since what actually matters is the subjective valuation of a good and the subjective valuation of alternative goods (the comparison/tradeoff). 

That scholars equate subjective valuation with objective money prices should be considered severe professional misconduct. For those who are in the business of thinking carefully about things, there is no place for conflating things. 

Or, as in this case, mistaking (interpreting, really) subjective value for being objective. This is inexcusable and should disqualify you from the academy.

Originally published on Twitter @PerBylund

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