David French | 23/04/2012 4:44:02 PM

This article was originally published as 'Assessment of Value' in The Morning Bulletinon 21 April 2012.

What is the value of a good or service that we buy? Are we consistent in our assessment of value when choosing a good or service? Are our choices rational in the context of everyday life?

Probably surprisingly I think a car is one of the best value purchases possible. A car provides freedom and mobility not equalled by any other transport choice. Say the cost of a car is $20,000 and its life is 10 years, that’s $38 per week – about the same as a carton of beer. Consider all of the components in a car - a set of tyres for a modest car will set you back at least $600, and a stereo about the same. $20,000 for the lot seems low.

Our Maytag washing machine is now 11 years old, and cost $1,300. That’s a capital cost of $2.27 a week – more or less equal to that of a can of Coke.

It strikes me as odd that people will happily fork out $38 for a carton of beer every week, but will balk at spending the same amount on upgrading their car. Or they will happily buy a can of coke each week, but persevere with a clapped out washing machine. What about incremental value? You can buy approximately three Great Wall 4WD’s for the cost of a Prado, so you could hold onto a Prado for 10 years, or you could have a new Great Wall every three years and be covered by warranty for the whole time. There is almost certain to be a quality differential between the two, but is it worth 300 per cent? Getting back to the washing machine, the difference between the cost of the Maytag and a Whirlpool (say) was about $300, or over 11 years, about 52 cents per week. You could lose that amount each week and not know about it, yet we balk at the differential and insist on haggling the last dollar from the salesman.

There is economic rationale underlying the answers to these questions (mainly to do with the fact that something received now is worth more than promises for the future), but is the trade-off sensible? Perhaps as a species we put too much value on immediacy, while assuming the future is more risky than it actually is. Perhaps that’s related to an underlying recognition of our finite selves.

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