Wednesday, November 13, 2013

How do we value things?

NYU Professor Adam Alter wrote an article for The New Yorker recently, in which he examined why we often do not value things properly.  He tells the story of how an elderly man tried to sell eight spray-painted canvasses in Central Park on a recent weekend.  The canvases were painted by a highly accomplished British artiest, who had sold two of pieces for more than $3 million several years ago.  Yet, on this Saturday, the elderly man selling these pieces on Banksy's behalf could not command very high prices.   In fact, the art was worth more than $225,000, yet he collected only $420.   Wow.  What an amazing disparity!  Why?  Alter argues that, 

"Beer and art share an awkwardly named property: they’re “inherently inevaluable.” Some concepts are easy to evaluate without a reference standard. You don’t need a yardstick, for example, when deciding whether you’re well-rested or exhausted, or hot or cold, because those states are “inherently evaluable”—they’re easy to measure in absolute terms because we have sensitive biological mechanisms that respond when our bodies demand rest, or when the temperature rises far above or falls far below seventy-two degrees. Everyone agrees that three days is too long a period without sleep, but art works satisfy far too abstract a need to attract a universal valuation."

In these situations where products are "inherently inevaluable," we look to certain cues to try to ascertain the value of an item.  Unfortunately, we pay attention to all the wrong cues.  Is the product sold at a fancy hotel or a cramped restaurant with outdated furniture and decor?   Is the product sold by someone in a fancy suit or a shabby t-shirt and jeans?   As Alter says, " We’re swayed by all the wrong cues, and our valuation estimates are correspondingly incoherent."   Think for a second about the types of products that you buy that may not be easy to value.  What cues command your attention?  Now, think about the products your firm sells.  What cues do you present the customer?  Are they helping to increase or decrease the perceived value of that product?

No comments: