The Mystique of Value: Why Small Things Can Have a Big Price
Markets are concerned with exchange, the purpose of which is to access resources that have value potential. What’s fascinating about value, however, is that it’s subjective. Auctions are perfect examples for this, as the huge discrepancy between the bid prices signify the presence of value subjectivity. But what exactly drives value or our willingness to pay?
Value is a multidimensional, cognitive construct in the sense that factors affecting it range from social contexts to the emotional state of the decision maker. There are different theoretical viewpoints to account for this multidimensionality of value. Whereas the classical economic theory emphasizes that value is solely derived from the instrumental and functional aspects of goods, evidence from sociology and behavioural economics suggest that hedonic attributes, i.e. attributes providing fun, pleasure, excitement, also affect value. To put it into context, for a car, the utilitarian features would be gas mileage and safety ratings, and the hedonic attributes would be sporty design, brand, or the enjoyment derived from driving a supercar. Yet, the utilitarian and hedonic aspects of value do not necessarily explain why a rather mundane cigar box, once owned by John F. Kennedy (JFK), sold for a small fortune at a closed auction, or why even the most ordinary sculpture comes to be worth millions if it is discovered to be made by Michelangelo, but worthless again if it turns out to be a counterfeit. These are the exact cases we would like to delineate in this week’s blog, thereby allowing us to probe into another dimension of value that is usually overlooked, and yet profound.
In our previous blog entry (see here) we have mentioned Thorstein Veblen’s (1899) theory of conspicuous consumption, in which, the purchase decisions of the majority of people (individuals living above the subsistence level) are made to signal wealth to outside observers. In a Veblen world, consumers communicate their social status through engaging in ‘wasteful purchases’, signalling their social standing through showing that they can afford to purchase those products with relatively low functional value. Although this might contribute to the explanation of why people pay significantly high amounts ($210) for a simple clay brick branded by Supreme, it still falls short of explaining the sudden change in value when an article is found to be related to someone well-known, as it was in the case of Michelangelo’s sculpture. This is due to the fact that Veblen would have predicted exactly the reverse, since purchasing a counterfeit sculpture poses more opportunity to signal the society of having higher capacity to waste. Accordingly, the explanation should lie elsewhere, leading us to the concept of social status.
Napoleon, in stating “A soldier will fight long and hard for a bit of coloured ribbon” remarked how much value individuals can assign to goods improving their social status, which, in his case, was equivalent to the value of one’s life. One might wonder what do we mean by status, exactly. Although Weber regarded status as the social honor attached to a group of people, in contemporary sociology literature, it refers to one’s standing in a social hierarchy, as dictated by respect, deference, and social influence. Accordingly, evidence from economic sociology implies these status characteristics have a significant impact on value perception. In particular, it has been shown that people assign higher values to goods that are previously owned by respected figures not because they derive higher utilitarian or hedonistic value from its usage, but because they derive higher self-esteem or honor from acquiring it. As such, people act as if the status of the respected figure is divided among the articles he/she had previously used or created. Therefore, they treat the purchase as a mechanism to transfer and capitalize upon the respected figure’s status, which is the case for Veblen goods. This is the exact case in the JFK cigar box example as people treated it as a tool to capitalize on the status value that the box represents due to its association with Kennedy. Furthermore, in the Michelangelo sculpture example, the reason for the sudden shift in the value arises from the fact that once it’s realized to be a counterfeit, the link between the sculpture and the associated status is broken. Thereby, the status value that could be obtained from acquiring the good eradicated, resulting in the substantially lower willingness to pay.
References and Further Readings
Ball, S. and Eckel, C. C. (1998). The economic value of status. Journal of Socio-Economics 27(4), pp. 495-514.
Thye, R. S. (2000). A status value theory of power in exchange relations. American Sociological Review 65(3), pp. 407-432.
Veblen, T. (1899). The theory of leisure class. New York: MacMillan.
Weber, M. (1946). Essays in sociology. New York: Oxford University Press.