It’s true, they don’t. 2 + 2 doesn’t equal 4. How is that even possible? Well, take my word for it, it’s possible. In a perfect world, the Cartesian coordinate system would go the distance and by that I mean every choice would be completely objective. You have 2 items with the same value (as in value for the customer, what the customer gets in exchange for his money), but one is 100 euro and the other is 200 euro, so a decision to buy will rely on price and price alone. That’s objectivity for you. Perfect knowledge means perfect decision. In real life, that’s not true. There are other factors involved, like brand recognition, peer pressure, past experience with other products the manufacturers make, and so on. Even more important than that is the perceived value of a product, hold on to this one because we’ll come back to it. All those things are distortions of the value system, bending and twisting the value of anything. Sort of like gravity bending the space-time.
You might choose between those two items using logic or you can do it by listening to other people’s opinion, though more likely you will be comparing apples to oranges. Did you read the reviews of video cards lately? Good luck trying to choose one by relying on reviews – most of the time you’ll find negative reviews for quite capable video cards, but those things were used on a system lacking RAM, subpar CPU, or one hell of a spyware infested environment. Or maybe you find the objective reviews but your CPU or motherboard is a massive bottleneck. Would it work as it should? I’d say it won’t.
In physics, two dimensional objects have one set of characteristics, three dimensional objects have another and let’s not go into hypersurface geometry where the brain usually yells “stop, let me out of here!”. Point being you can’t really measure anything unless you’re doing it from the broad view towards the restricted view. In a hyperbolic space, the Pythagorean theorem isn’t valid and the sum of the angles in a triangle isn’t 180 degrees. Yes, I know, worldlines make for a bad metaphor when it comes to economics, but still.. They’re sort of close to it if you factor psychology into it.
You can factor price evolution using them. Think of it as some sort of value decoherence system, where you assign a value for something, but even if the coordinates (physical attributes, what that thing does, what you’re using it for, and so on) don’t change, your assigned value will fluctuate because of your perception. Sounds crazy, right? Well, it isn’t. Perceived value changes and by that I don’t mean price. Price is a reflection of value. If Apple priced IPhone at 100 euro, would it have the same buzz? Probably not. Usually, something with a higher price than the competition is thought to be better. Higher price changed our perceived value, because ego is distorting our opinion. We feel we are better than our peers because we own something they don’t. Our identity changes to reflect that.
In a perfect world, price becomes an equation we can solve – price equals cost + features + average industry profit. In reality, price equals cost + features + brand + average industry profit +/- buzz. That’s why we have smartphones with more features priced at less than an IPhone. Hell, for the price of an IPhone you could buy a state of the art desktop computer that runs the latest games at above average performance. That’s why the Apple Watch sold so much at first and now the sales tanked. The buzz went away, faded, and all we’re left with are the features, what the gizmo can actually do.
Psychological distortions have to be evaluated if we’re after the truth. A fixed income is, in all fairness, the best benchmark for this. If we, for instance, were to raise taxes for everybody, do you think we, as the government, will get more money? In a perfect world, we probably would. But we don’t live in a perfect world, we live in a selfish world where we don’t measure wealth by absolute values but use comparative values. In this reality, raising taxes means less money for other things so a fixed income leads to less spending – we get more money from income tax but less money from other taxable sources, like VAT and the like. We’ll spend less on food, clothes or other things we can afford to cut. The higher taxes go, the less sales happen – because the rich can afford to shop elsewhere, we can’t. Higher taxes means less business for smaller companies, who also happen to be barely surviving. Higher taxes mean fewer jobs. We just shot ourselves in the foot. But that’s not the point. All this is sort of acceptable if and only if we think our wealth can take the hit, but there’s a catch. We say wealth when we actually mean income gap between social classes. We define wealth as the relative income inequality. We make our choices by comparing our income to others instead of looking at absolute values. This, unfortunately, makes us extremely vulnerable.
Vulnerable seems like a strong word to you? It shouldn’t. We don’t live in a perfect world. Here, now, people decide what they want by looking at what others already have. It just wouldn’t do to have a 10 year old car when my next door neighbor bought a BMW, it would make sense if he were an executive or well, has a higher income than me but he’s just like me in every way, from the number of kids down to the numbers on his paycheck. Having less would mean I’ve accepted I’m somehow worth less. Identity again. Identity decides what we do, how we spend and what social responsibility we assume. An unskilled worker who won 10 million quid at the lottery can live happily for the rest of his life, if he were to keep his lifestyle and spending habits. Think about it. People like that get less than 100k quid a year – that’d last him about 100 years if we assume the bank would only give him enough interest to cover for inflation. That’s exactly what he’d do in a perfect world, pay up all debt, locate a nice cottage for under 200k, then retire. If you don’t think 100k a year can be enough to live a decent life, you obviously haven’t visited places like Eastern Europe – where food prices and gas prices are almost the same but most people make less than 20k quid a year. Hell, I’d keep a house in Romania and one in southern Spain for instance if I were to retire, if Transylvania is good enough for Prince Charles it’s probably good enough for me. Nice people there, too. Does our lucky formerly labeled unskilled labor even consider such an option? 99% of the time, that’s not even on the agenda. Why? Because he thinks more money means he’s worth more, that he’s above his former comrades. His wealth changes who he thinks he is, it changes his identity.
Who we are, who we think we are, is a self-imposed barrier that distorts our way of thinking. We’re used to thinking we’re better than this, everybody sort of believes money is the key to everything. We believe we are entitled to money, it’s like when the electrons change orbits when their energy level changes, when they absorb photons. We believe having more money means our habits and our lifestyle have to change to reflect that. Go watch Secondhand Lions, that’s a fun way to see what happens when people learn they’re supposed to spend money. The yacht in the pond is truly a masterpiece.
Consider this, people – we judge ourselves before we judge others. If money is all we’re after, suddenly getting money will change who we are. We’ll think our value just jumped up and our lifestyle will change accordingly. That means a new house in a better neighborhood, a new and expensive car, Saville Row suits, vacations in Monaco or the Caribbean, in other words we’ll try to live like other rich people. Suddenly, those 10 million quid are lunch money. How long do you think our buddy will last after such a spending spree? Unfortunately for everybody involved, new money can’t imagine making more money. They only see the items and not the struggle, they see the image and not what it actually costs to keep up appearances, they can’t even add up the upkeep cost of a mansion, the money spent on gardeners, on limos, on insurance and so on. It’s not something they even bother with.
Everything we do is a reflection of our own identity, we decide without considering the cold numbers, we act in exactly the way we believe the person we identify with ought to act. What would Bruce Willis do? What would Donald Trump choose? It won’t matter if we like beer, we’ll drink and praise our love of cognac because we believe we are the sort of person that loves and drinks cognac. We could do without an IPhone but we’ll buy one nonetheless because we are Apple fans and being an Apple customer means we’re better than all those filthy Android users. I mean, look how nice and elitist that things is, so shiny and new. How many girls selling brand clothes have to wear expensive clothes just to work there? Can they afford it? I don’t think they can, not unless they have other sources of income. A waitress might make more money than them, but more likely that’s beneath them. A high-profile banker or lawyer can’t be arsed to show up in an old Renault, because all high-profile bankers and lawyers use limos or drive Aston Martin DB5s. It’s not something most are aware of, it’s a herd instinct. They could make 500k a year but still have less money in their bank accounts than a good engineer who only wears suits at weddings or funerals and only feels at home around steel bars and computers. Then again, the engineer probably only has to dress for success when showing up for a job interview.
The problem we’re facing is exactly like shopping for a new video card to upgrade our PC. We have the exact characteristics, features and capabilities, we have transparent pricing and we’re able to compare similar items, and more important, we know exactly what our PC can do and can’t do. Do we use that knowledge? Not bloody likely, we’ll decide based on what others say about our options, we’ll read reviews that tell us the performance of video cards in completely different PC configurations, even different operating systems. We’ll take our objective measurements and throw them out the window, complete strangers know better than us what’s best for us. We distort our values, our perception of value to match the opinion of strangers, and we do that on purpose. It’s exactly what it sounds like, even if we’re talking about clothes, cars, gadgets or behavior. We behave in a certain way because we think that’s the desired behavior, because the person we think we are is supposed to act like that. How do we know that? Because complete strangers, actors, famous people, marketing, you name it, defined the identity for us. We don’t get to choose because others already chose for us. Our only choice is between Bruce Willis, Brad Pitt, or if you’re a woman, probably Angelina Jolie or whoever else. My list of famous people I know of is rather short, so don’t hold that against me.
The numbers don’t add up because we believe they shouldn’t.