Metres or miles, kilograms or pounds, months or seconds, and indeed money – they’re all yardsticks that allow us to quantify length, weight*, duration and value. But there is something strange about the latter one.
In economics, money is said to fulfil three functions. It is a store of value and a medium of exchange (you can keep it in your bank account or your mattress until you are ready to spend it in return for some good or service), and it is a unit of account, or a yardstick. You can express the price of a tin of paint in pounds, dollars or euros – or whatever currency is appropriate for you – just like you can express the quantity in (milli)litres or fl.oz, quarts or gallons. And both units are quite handy. If you need some paint, you can determine how much “some” is by expressing your required quantity as a number of units, and so make sure the quantity you buy is sufficient to meet your need, without exceeding it by too much. In a similar way, you can ensure the total price fits withing your budget.
Not so objective
The content of a tin of paint is objectively and invariably, well, what it says on the tin. That is not quite the case for the price, though. Maybe the store at the other end of town sells the same tin of paint for 10% less. Just imagine if different brands of petrol operated their own size of litres (or gallons), or if the grammes used to measure quantities of cheese or meat used by one store were not the same as in a rival one. While such variability in units of volume or weight would drive us crazy, intriguingly, we can cope without problems with this variability of our monetary unit of account. We are quite capable of assuming there is some kind of general, rough, market price for most products from which individual offers deviate a little or a lot, on a scale stretching from incredible bargain to preposterously expensive. For many of the products and services we buy regularly, we have a pretty good idea what this conceptual price is – whether it concerns loo roll, a decent bottle of wine, or a leather sofa.
But there is something else intriguing about money as a unit of account. Money, when we spend it, explicitly communicates how much we value something. People might pay perhaps £20 to see a tribute act of the band AC/DC, but they might pay ten times as much (or even more on the secondary market) to see the real thing. Both provide a couple of hours of audiovisual entertainment, but somehow, the perceived value of the latter much higher. When we celebrate a very special occasion, we might splash out on a bottle of vintage champagne of £40, while on an ordinary Saturday night in front of the television, we are quite happy with a bottle of sub-£10 bubbly. Both offer a pleasant drinking experience of an evening, yet the value to us of the former is apparently more than four times that of the latter.
There is an inescapable logic to this conclusion. If we buy something, anything, for whatever price we are willing to pay, it must be worth at least that amount of money to us, for otherwise we would not buy it. And if we are willing to pay more for one thing than for another (similar) thing, we must value it more. In fact, should the “(similar)” between brackets really be there? There are numerous other ways in which we could spend the money for the posh champagne, and yet we don’t, so our choice makes clear that we believe that this is the best use we have for the £40.
Since we can reduce the value of anything to the amount of money we are prepared to pay for it, we should be able to work out what we value most, and effectively establish the value of all the goods and services we buy in relative to one another, by looking at the ratio of the respective prices we are prepared to pay. A leather sofa is providing as much value as 50 haircuts, a tankful of diesel is valued the same as 40 loaves of bread, the value of an annual holiday is similar to the annual gas and electricity bill.
Market prices and demographics
It is, of course, not quite that simple. The quantitative precision of units of currency implies an accuracy in using what we pay as an indicator of perceived value that is often not realistic. For example, if we are lucky enough to live in a country where drinking water (vital for us all) comes from a tap in unlimited quantities, the price we pay for it is very low because of its abundance of supply. If there is plenty of water available, we won’t have to pay for it according to its true value (keeping us alive). The actual price of a product in a market is determined by its marginal utility, not by its overall usefulness. Furthermore, we tend to think in categories, and rarely carry out comparisons across categories: though both have value to us, we would not normally find it useful to express the value of our internet service in terms of kilos of potatoes.
When there is no market to set prices, though, money can reveal something of the value we attribute to something by how much we are willing to pay, and social scientists make use of this. For example, a study by Washington State University economist Patrick Carlin and colleagues, carried out in 2022 (during the COVID pandemic) surveyed over 4000 people about what they would be willing to pay to be exempt from the mandatory wearing of a facemask for three months. 56% were not willing to pay anything (an unknown proportion of them because they were happy to comply), but the average willingness to pay was $525 (£414), and 0,9% of the respondents would pay more than $5,000 (£4,000). The overall average conceals considerable diversity across age groups, however, from just under $50 on average for over-65s to $1259 for young adults up to 29 years.
If the demographic spread in this research cautions us against ill-advised generalization, a study by Chinese University of Hong Kong behavioural scientist Catherine Yeung and colleagues does so even more. Cash incentives can be (and are) used to encourage people to alter health-related behaviours, like taking their medication as prescribed, giving up smoking, or follow a diet and do exercise to lose weight. Here, money is perhaps an even purer way of eliciting people’s perceived value. This research focused on cash incentives for achieving weight loss. In a randomized controlled trial, 472 participants followed a self-administered online weight loss programme for three months, some of whom were offered $150 £120) if they lost at least 5% of their body weight over the period. Among the participating men in the no-incentive control arm, 5.9% met or exceeded the target, while among those who were promised the cash reward, more than three times as many (20.9%) were successful. The average weight loss in the incentive group was 2.4%, against only 0.9% in the control group. Remarkably, the incentive had no effect on the participating women. The average weight loss in the incentive arm was not significantly different from that in the control arm – in fact it was even lower, at 1.03% vs. 1.44%. The same was the case for the proportion of participants who met the 5% weight loss goal (8.6% and 8.7%, respectively).
The study did not allow the researchers to establish the mechanism behind this curious gender difference, but they speculate that social rewards have more significance for women as a group than for men when weight management is concerned. In any case, it is important to acknowledge the radical difference between men and women for cash rewards in this context.
These two studies show that, alongside idiosyncratic differences in perceived value of the same thing, based on individual preferences, there can be significant demographic differences. Generalizing assumptions or findings on perceived value across demographic groups can be seriously ,misleading.
How we spend our money, and what we are prepared to do for it may very well provide some indication of what we value. But we should be careful not to read too much in the perceived value that is reduced to cash, and beware of treating money as an accurate yardstick, just because it looks like one.
*Actually it is mass, of course, and not weight, but you know what I mean!
Koenfucius 