Why did you choose that bag of tortilla chips? What was the choice being made?
What was the choice being made?
Supposing you’re walking through the supermarket on a very familiar aisle: the snacks, colorful almost garish packages of chips and cookies fill the shelves. Most of the time you walk through this aisle quickly without stopping because you know your own weaknesses, but this time a bright blue unfamiliar package catches your attention.
You stop and examine it, it’s a new kind of tortilla chip one marketed as spicy but still helpful, you turn the package over to read the nutritional information. Surprisingly it’s not too bad the ingredients are natural and even though it contains a lot of salt there’s not much sugar fat. Plus you haven’t tried this brand of chips before and so you could learn whether you like it. So you place the chips in your basket and continue your shopping.
Before you answer assuming that you like me can relate to the hypothetical shopping trip let’s move from why to what. What was the choice being made?A traditional economist might describe the choices between the tortilla chips and money, specifically their price. of course tortilla chips and money are two very different things so will have to compare them on some common scale for decision-making for which we use a shorthand of utility.
Value and the puzzle of choice
We derive positive utility such as pleasure from eating those tortilla chips and that pleasure outweighs the negative utility or pain of giving up money. There is a puzzle here though: when we purchase something at the supermarket we almost never consume it immediately. All of the benefits whether through taste or nutrition come much later, perhaps after hours or days.
So, your choice must be based on something else, some internal sense some anticipation about the future. I want you to think for a moment about just how complicated even this sort of simple decision can be. Think about and how much information you can bring to bear on this single consumer purchase. Your normal snack preferences, your knowledge of different brands since the nutritional value, even the aesthetic quality of the packaging.
Those and many other factors all come together into some internal sense of value. That seemingly simple term value lies at the heart of decision-making. If we can understand how value is calculated then we can understand the choices people make and we can learn more about how people’s choices go awry in day-to-day consumer choices, in long-term financial investments and even in well-known medical disorders.
Pleasure and pain
Let’s begin by considering value from an abstract economic point of view. One natural speculation is that positive value corresponds to pleasure. We purchased the tortilla chips because they generate pleasure. Whereas negative value corresponds to pain. Indeed we use the language of pleasure and pain all the time. We say things like we feel good about our decisions or that the cost of our new car was painful but it was still worth it.
Linking value to pleasure and pain is an old idea. In the late 18th century the English philosopher Jeremy Bentham composed an introduction to the principles of morals and legislation, a spectacularly far-reaching work that explored everything from the nature of consciousness the legal responsibility, to the fundamental motivators of our decisions.
Bentham began with a simple declaration “Nature has placed mankind under the governance of true sovereign masters: pain and pleasure. It is for them alone to point out what we ought to do as well as to determine what we shall do. On the one hand the standard of right and wrong on the other the chain of causes and effects are fastened to their throat. They govern us in all we do and always say and always think. Every effort we can make to throw off our subjection will serve but to demonstrate and confirm it.”
What forceful writing! To sovereign masters pain and pleasure, what we ought to do what we shall do! Bentham seems to argue that not only do we value what gives us pleasure, but we should value pleasure. To paraphrase him bluntly denying the pleasure principle only gets us in trouble and this thinking has served as a foundation of theories of utilitarianism, one of the major streams of moral philosophy in the succeeding centuries.
Extracting value from benefits
But pleasure can’t be the only thing that matters indent them himself recognize that about 30 years later Bentham added a footnote to the section. He noted that pleasure corresponds more to subjective states like happiness and it really does to the underlying motivator for our actions. So what else besides pleasure could determine how much we value something?
A second possibility is that value is determined by how much we benefit from something. Many of the things that we value have clear benefits: food provides nutrients, clothing protects us from the elements, our homes provide shelter, even our social interactions have value through the well-being of our children relatives and friends.
Some scientists extend this argument all the way to what is called adaptive fitness. They argue that value can be defined by the extent to which an action improves our chances of passing along our genes. Clearly our decisions are influenced in some way by all of these sorts of tangible benefits, but it is easy to come up with counterexamples.
Think of a recent trip to a restaurant you might’ve paid a premium to eat a well marbled, steak a plate of aged cheeses were attempting chocolate dessert. Going to that restaurant surely generated pleasure, but if anything it provided fewer nutrients and had more deleterious effects on your health and much less expensive options, such as staying at home and cooking a simple meal with fresh produce meats and grain.
The value of rarity
We can’t explain what we value by either pleasure or benefits alone, they often trade off against each other. There are even cases where the value of a good can be completely detached from its benefits. Consider a rare designer handbag of the sort worn by a Hollywood starlet to a high visibility media event.
That handbag may selling luxury boutiques for tens of thousands of dollars, even though its features are objectively no better than those of a department store $10 handbag. It is valuable precisely because it is rare and exclusive and thus its demand actually increases with increasing price. This handbag is an example of Veblen good named after the late 19th-century economist Thorstein Veblen.
In a myopic focus on benefits can even lose sight of life’s true joys. A few years ago I took a family trip to the great Smoky Mountains National Park. This park is one of America’s natural treasures, almost 1000 mi.² of hardwood forest, meadows, valleys laced throughout my streams and come down cold from the surrounding mountains.
At one point during the trip I was standing and shivering in one of those mountain streams watching children splash about in the surrounding water. I was very cold, very wet but also very happy. I wouldn’t trade the memory of the trip and of those cold mountain streams for anything even though I would be hard-pressed to identify any tangible benefit standing knee-deep in freezing water.