The Role Perceived Value Plays in Economics – It’s Pretty Big

I just finished reading a Wealthy Nickel post based on responses from a recent Reddit poll asking readers to list things they would never spend money on. Many of the respondents expressed not understanding why other people spend money on these particular things. The final item mentioned in the post answers the question: it is perceived value.

That final item is diamonds. The Wealthy Nickel article’s author wrote the following: “the diamond business model was called out for being an inflated, perceived value while creating high demand.”

Few would argue the point that diamonds are only valuable because a combination of rarity and demand. Diamonds are comparatively rare. And because they are rare, people want them. Rarity and demand guarantee that prices remain high. But don’t forget perceived value. It affects how much people are willing to pay for diamonds – and everything else.

Perceived Value Is Everywhere

Most people do not understand how big a role perceived value plays in economics. Perceived value is everywhere. It is attached to everything we buy. Everything, period. From the clothes on our backs to the houses we live in to the cars we drive, retail prices are determined by the value consumers place on things.

Why does a brand-new pickup truck cost nearly $40,000 these days? It is not because the manufacturer spends that much to build it. It’s because people are willing to pay the price. And people are willing to pay so much because they perceive the value of a new truck to be that high. If nobody were buying $40,000 pickup trucks, you would see the price fall dramatically.

Perceived Values in Real Estate

The real estate sector is very much prone to perceived value. According to the experts at Actium Partners in Salt Lake City, UT, real estate is one of the purest supply-and-demand markets around. Actium makes hard money loans to real estate investors who need fast turnaround times and simple underwriting processes. They know first-hand that property prices climb as demand outstrips supply, and vice-versa.

This fundamental truth does not apply only to the commercial real estate transactions Actium Partners funds. It applies to residential purchases as well. If you have paid attention to residential property prices over the last couple of years, you know they have skyrocketed. But why? Supply and demand.

In popular markets like Tampa, FL and Salt Lake City, housing costs are higher than they have ever been before. Residential homes in both locales are not superior to homes in other parts of the country. But buyers place greater value on homes in both cities because Tampa and Salt Lake City are places people want to move to.

All Value Is Perceived

The dirty little secret here is that all value, at least in a monetary sense, is perceived. You value the car you drive because it is critical to maintaining your preferred lifestyle. But its value to you is practical, not monetary. So if you were to sell your car on the used market, how would you determine the list price? You would look at what people are currently paying for the same car in similar condition.

Whatever price you came up with would be based on a perceived value. But your car is only worth that much if someone is willing to pay that much. And if not, you will have to drop the price to sell. Your perceived value is not the same as someone else’s perceived value. All economics are rooted in that very principle. The monetary value of any asset is what people perceive it to be.