The Psychology of Value and Dollars

Aaron Klaheck

2010

The value of a dollar is completely dependent on the mental state of the person assigning the value. The only reason a dollar has value is because it is perceived to have value. The value of money is derived from the feelings we experience while using items we pay for with money or the avoidance of unpleasant things bought with money. This value is not only subjective but changes with differing circumstances. This is true, not only at the personal level, but also at the societal level. In short, the common concept of money is flawed.

When many people cognitively think about a transaction, their thought process will go something like this: “Is this item worth x amount of money?” Many think they are assigning an item a dollar value. However, subconsciously we are not assigning an item a dollar value, we are instead assigning the dollar a utilitarian value. A utilitarian value is the value we assign to an item or service that brings us joy, pleasure, or in general some sort of good feeling. Utilitarian value can also be thought of as the value of an item or service in its ability to forestall or eliminate pain, anger, or in general any unpleasant feeling. This notion is hard for most people to believe because virtually every item has a set dollar value. However, where do these set dollar values come from? They are based on the price an “average” person would assign to that item. But this value, in virtually all cases, is not even correct, which is why you will see many items overstocked (too high a dollar value) or under-stocked (too low a dollar value). But in any case, this idea is most clearly demonstrated through an example. Say there are two people each of which have a dollar and they want to buy a stick of peppermint gum with this dollar. The first woman imagines herself chewing the gum; she senses the cool refreshing sensation. She can imagine her taste buds light up with enjoyment and breathes a sigh of relief. She remembers the experience of chewing it before and responds instantly. She knows intrinsically what that gum is worth to her - its utilitarian value. With this utilitarian value of the gum in mind, she decides to buy it. The second woman goes through the exact same experience, however, she decides not to buy it. Both women thought the utilitarian value of the gum was exactly equivalent and they had the same amount of money. The objective value of the money was no different - one dollar bill was no better than the other in reality. So why did both women make different choices? Because the latter woman assigned the utilitarian value of her dollar a higher worth. But how can this be? The value of a dollar is a fixed thing. You can buy this much bread, or this much milk, etcetera. Nope, this a complete illusion, and is not tied to the reality of what the money is worth to us - its utilitarian value.

When we think of the value of money we subconsciously think of its utilitarian value. For example, I love electronics kits. When I am deciding on whether or not I want to buy something I am comparing it to an electronics kit (I really don’t care what the price of bread or milk is). I think, I would like to get those ear phones, but for the cost of two of those earphones I could get one electronics kit, so I think I will pass it up this time. One might then argue that the price of the item you love is set, so the value of money is still somewhat set this way. However, this is also not true. I know the utilitarian value of my electronics kit, the feelings and sensations when I am building and using it, the whole experience. I do not need the company to tell me the items dollar value, I know what that item's utilitarian value is, I have experienced it firsthand. I also know that if the price of the kit doubled I would not buy it, I would find some other kit or just make it myself. Moreover, I would also be willing to pay a little more for the kit than what the company is selling it for. This is because I have assigned the value of my money to a certain utilitarian value, and this utilitarian value is completely dependent on my own personal experiences. This means that the value of the dollar is not set and is not comparable to any one thing! Not even gold could set the value of a dollar for me, I could care less what the value of gold is, I don’t need gold for anything.

Not only is the worth of a dollar set by its utilitarian value, which for the most part is arbitrary, it also changes over time as a person's circumstances change. For example when a friend of mine wanted to get a new boat, the utilitarian value of his dollar went up. He was not willing to part with his dollar for things he might have before he decided to get a new boat, because he imagined how much fun he would have on his new boat and therefore the worth of his dollar went up. We have now established that money at the individual level has no set utilitarian value and actually changes quite a bit over time. Now we will look at the societal effect of money.

The value of money at the societal level is just the conglomeration of peoples constantly changing opinions of the utilitarian value of money. If the majority of the people think that the money they have is not worth much then I won’t be, if they think it is worth more than it will be, it really is that arbitrary. The utilitarian value of money at the societal level may average out to be somewhat consistent over time, but many times it doesn’t. Public opinion of money has been known to go up and down even in as little as a few months (for example when the stock market crashed). The only reason that the value of money, at the societal level, is stable is because the societal opinions about money's utilitarian value have stayed fairly consistent over time, for now.