It’s an easy-enough concept to understand if you think about a Prada handbag: unless I can resell it on Craigslist, it has almost no value to me. I don’t care.
But I have some friends who would pay an exorbitant amount for one. And most of them have equal difficulty understanding their husbands’ obsession with the ‘perfect’ home theatre system.
You’d think the investment business would be immune from this subjective sense of value, as we can measure ‘real’ value in dollars and cents, and ratest of return.
Instead, the distortions of perception are everywhere in our business. Our last loss – or gain – carries more emotional weight than our feelings about our overall wealth. Cautious investors enjoy their ‘safe’ bonds when any inflation or real growth in the economy will quickly show that they weren’t that ‘safe’ after all.
The point is that these aren’t really distortions at all, or they are only distortions if we come to regret them or feel fooled. How we feel about our investments is of real value. The easiest way to feel good, of course, is to grow their dollar value. but trusting an advisor, a stock or a portfolio manager is another way to feel good. Reducing volatility is a popular way to feel good, or at least not feel bad.
Checkout ad man Rory Sutherland’s take on Von Mises and why perceived value IS value:
Ted Talk: Perspective is Everything
(I’ve linked you to the relevant segment, but if you’ve got 20 minutes, the whole talk is great).