Value, Price, and Cost

The concept of Value vs. Price is one that I am inexplicably fascinated by. Maybe it’s the fact that most people ignore it entirely, or maybe it’s because following its principles virtually guarantees success in any area.

Most people do not understand the difference between value and price or, at the very least, greatly underestimate it.

So, what is the difference between value and price? Value is the benefit derived from an action, and price is the benefit lost by performing an action. What makes this such a profound concept is that every action has a value and a cost associated with it, and it is usually fairly easy to measure. Our unconscious minds are constantly evaluating the price and value of every possible choice, which ends up governing many of our actions.

Example #1 – Wealth

Take the purchase of a computer as an example. If you buy a computer for $1000, the price is simply $1000. But what’s the value? Let’s assume that you’re a writer, and you are replacing an old computer which has suddenly broken. You have a book due the next day, and will be penalized by $10,000 if you do not turn it in on that day (yes, I know this isn’t a realistic penalty). In this case, the value is about $10,000.

For me to buy that computer, however, the value is far less. I have several computers. I don’t use the computer that much anymore. The value isn’t $0, because I could potentially sell the computer (probably for less than $1000), with an additional price of my time. So the value may be $700 to me.

In this example, the decision of whether or not to buy a computer is obvious for both me and the writer. The writer should buy it, and I should not. The cost of an item is the net effect it has on us, after considering the price and value. For the writer the cost of the computer is -$9000, meaning that he is essentially gaining $9000 by completing the transaction. To me the cost is $300, meaning I am losing $300 by buying the computer.

An interesting phenomenon to note is that sales often don’t REALLY affect the cost of an item. For example, if there was a $200 off coupon for that computer, it wouldn’t change my decision to buy the computer or not. It obviously wouldn’t affect the writer either. The only possible effect it would have is to make us more likely to purchase that product AT THAT STORE, rather than at all. I see many people (I used to be very guilty of this) buying things with low price, but significant cost. Doing this is a sure path to financial scarcity.

Of course, price isn’t simply the number on the pricetag. What if the computer was for sale at $800 100 miles away, and $1000 2 miles away? A round trip drive to get the cheaper computer would take me 4 hours rather than a couple minutes. If four hours of my time (plus wear and tear on the car and gas) is worth less than the $200 difference in price, the writer should drive and get that cheaper computer.

This seems like a simple concept, but I can’t tell you how many times I’ve seen people (myself included) spend hours searching for a lower price on something which only ends up saving $20 or so. Often times dealhunting isn’t worth the cost.

Example #2 – Relationships

More interesting is this concept applied to non financial matters, because most people don’t even begin to consider it. Let’s take, for example, the choice of going out to clubsor staying in.

If I go out to a club, the intention is to meet women. I don’t drink, I don’t dance, and I don’t particularly relish the club atmosphere. Sometimes I’ll go downtown to hang out with friends, but that’s a different decision.

In any given night I might talk to 9 different women. Three groups of three. For me to be significantly interested in a girl, it takes time for me to get to know her (mainly because I’m picky and have a list of things which will disqualify her). I would estimate that I am seriously interested in one out of three hundred girls that I meet downtown.

If I’m interested in a girl and have a good opportunity to get to know her, I believe that she will be attracted to me almost 100% of the time. However, I’d say that getting a good opportunity to get to know a girl only happens around 40% of the time. The club atmosphere makes it difficult to get a good opportunity, but it is possible to increase that percentage to 100% with skill. In LA it was probably more like 70-80% for me when I was well practiced.

So let’s boil these numbers down. If I’m only able to attract 40% of the 300 girls necessary to find one I’m interested in, that’s 750 girls I must meet before finding one who I will be compatible with and will develop a relationship of sorts with. If I am meeting 9 girls per night, that means that it will take 84 nights out to “meet someone”.

On an average night, including driving and getting ready, I probably spend 5 hours to meet those 9 girls. That means that the price of meeting a girl is 420 hours of my time. That’s significant.

Of course, I do have fun when I go out and meet all those people. Some might become friends. I’m also going out with my friends and we joke around and have a good time. However, I would probably be doing something fun if I wasn’t going out as well, so those two effects can cancel each other.

What’s the value of beginning a relationship with a girl? It’s tough to say. If I had no other means of meeting a girl, I would probably go out religiously. The cost of NEVER having a girl is monumental, so I would be willing to spend the 420 hours of my time to meet that girl.

The reality, however, is that I do meet girls in other situations. Whole foods, friends of friends, and even through my blog. This is why I rarely go out anymore – the price I pay is simply not worth the value I receive.

Example #3 – Health

One last example is eating healthy. Eating raw food is expensive. I went to the grocery store last night and spent $150 buying 4-5 days worth of food. That’s probably about $7000 more per year than regular food would cost me. It’s also a pain. I can’t eat anything more than a plain salad at most restaurants. Some of the foods aren’t as tasty as conventional foods. That represents a significant price to pay for eating raw food.

What is the value of eating raw? For one, longevity. I believe that I will not only live for 10-20 years longer than the average person, but will be active and healthy for at least 10-20 additional years. I also need less sleep (to be determined by my break from Polyphasic sleep), which gives me more usable time. Let’s say that I go from 8 hours to 5.5 hours, which I feel is conservative. That’s 912.5 hours per year, or around 50 extra days. I also feel a lot better on a daily basis and look better thanks to lower bodyfat percentages and better skin.

For the sake of convenience (and because we don’t have years to make every decision), let’s cancel a few things out. Let’s say that the value of feeling and looking better is roughly equal to the cost of not being able to eat out, and not being able to eat tasty things like egg rolls.

The average lifespan is 75 in America, so let’s assume I will live to 90. I believe that’s very conservative. Since I am about 25 now, that means that I will be alive for another 65 years. At 50 extra days per year thanks to decreased sleep, that gives me an extra 3250 days of life, or almost 9 years.

The additional $7000 price of eating raw multiplied by my remaining 65 calendar years adds up to $455,000. That’s not insignificant.

So, when it all boils down to it, I am paying $455,000 for an extra 24 years of life, or $19,000 per year. To me that’s obviously worth it. To others it’s not. How about you?

Living Your Life

Living your life by the concept of Value vs. Price is essential. By constantly increasing the value of your habits, relationships, and posessions, you are constantly moving forward, and increasing your pool from which you are able to pay the price of new value. For example, with all my extra time, I can SPEND more time to gain more value.

Being a lawyer, to me anyway, would be the opposite. The value I would receive would be high (a high salary, power, prestige, etc.), but the price would be far too dear. Giving up my waking life for the majority of my productive years is not worth $100k, $200k, or even $1mil per year.

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11 comments

  1. “Giving up my waking life for the majority of my productive years is not worth $100k, $200k, or even $1mil per year.”
    Now YOU nailed to the head. I also think like this, specially about going out thing. I work from when I wake up 6.30 till 17.00h plus eating and shit till 18.00. How little time do I got left? Girlfriend is nice, but I got more important things to do. Get money to work less time.

  2. Most people will be able to work less than the average 40 hours if they stop buying piles of worthless shit, a bigger house than necessary, etc.

    We recently calculated that I only need to work 20 hours a week to make enough money from my current job. 20 hours is enough because we live in a cheap apartment, doesn’t buy designer cutlery and other unnecessary stuff.

  3. another thing people usually fail to consider is the cost of credit. buy-now-pay-later adds tremendously to the dollar cost of things bought that way. Is it really worth it to get it faster? I’d say usually not.

  4. $455,000? Sure, $7,000 spent over the course of 65 years will amount to 455,000 nominal dollars — but the cost in today’s dollars is much cheaper.

    Assuming a 3.5% rate of inflation per year for the next 65 years, and an annual cost of $7,000 for the next 65 years, you are really only spending $178,624.94 in 2006 dollars.

    Finance is pretty cool stuff, eh? 🙂

  5. dan: Assuming the price of food is inflated along with everything else, $455,000 in 2006 dollars is correct. The non-adjusted value would be much higher because 65 years from now it’ll cost a lot more than $7000 to get raw foods. Of course, you never know what prices of some things will do; maybe 5 years from now everyone will be eating raw foods and they’ll get as cheap as non-raw groceries.

  6. I work 60 hours per week and earn 750$ a month. You try living like that. If I had a 20hour wor week I would have two or three buisnesses on the side by now (and again would be working 60h a week 🙂

  7. Right on AJ — i wrote the exact thing last night, then laptop battery died.. thanks for setting it straight

    bender — what do you do for a living?

  8. Living your life by the concept of Value vs. Price is essential. By constantly increasing the value of your habits, relationships, and posessions, you are constantly moving forward, and increasing your pool from which you are able to pay the price of new value. For example, with all my extra time, I can SPEND more time to gain more value.

    I like this idea, but I’m not so sure about the analogy of the money to living ratio… While you will most likely be healthier than the average 75 year old, would your 90 year old body really provide you with such a good quality of life for those extra 25 years? Yes, it could… but then again, you could get dementia or any of a number of ailments.

    I’m not knockign your lifestyle in the slightest. Actually I quite admire it… but I have a feeling that for myself, I better get all my ‘real’ livin’ out of the way long before I’m 75. Mainly because I have no idea if I’m going to be able to enjoy life at all when I reach that age.

    Just my opinion though.

  9. Yikes! Thanks a lot. I’ve e-mailed you to give you a free copy of the book for helping out.

    I can track where people buy from and usually I’d sell around 1 a day from the site. For the past week or so I didn’t see a single sale from the site and I wondered why. Mystery solved!

    Tynan

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