The paradox of value - Akshita Agarwal — Transcript

Full transcript

1. 0:06Imagine you're on a game show, and you can choose between two prizes:
2. 0:10a diamond
3. 0:12or a bottle of water.
4. 0:14It's an easy choice.
5. 0:15The diamonds are clearly more valuable.
6. 0:18Now imagine being given the same choice again,
7. 0:20only this time, you're not on a game show,
8. 0:22but dehydrated in the desert after wandering for days.
9. 0:26Do you choose differently?
10. 0:28Why? Aren't diamonds still more valuable?
11. 0:31This is the paradox of value,
12. 0:34famously described by pioneering economist Adam Smith.
13. 0:38And what it tells us is that defining value is not as simple as it seems.
14. 0:43On the game show, you were thinking about each item's exchange value,
15. 0:47what you could obtain for them at a later time,
16. 0:50but in an emergency, like the desert scenario,
17. 0:52what matters far more is their use value,
18. 0:56how helpful they are in your current situation.
19. 0:59And because we only get to choose one of the options,
20. 1:01we also have to consider its opportunity cost,
21. 1:05or what we lose by giving up the other choice.
22. 1:08After all, it doesn't matter how much you could get from selling the diamond
23. 1:11if you never make it out of the desert.
24. 1:14Most modern economists deal with the paradox of value
25. 1:17by attempting to unify these considerations
26. 1:20under the concept of utility,
27. 1:22how well something satisfies a person's wants or needs.
28. 1:25Utility can apply to anything from the basic need for food
29. 1:28to the pleasure of hearing a favorite song,
30. 1:30and will naturally vary for different people and circumstances.
31. 1:35A market economy provides us with an easy way to track utility.
32. 1:38Put simply, the utility something has to you
33. 1:41is reflected by how much you'd be willing to pay for it.
34. 1:44Now, imagine yourself back in the desert,
35. 1:46only this time, you get offered a new diamond or a fresh bottle of water
36. 1:50every five minutes.
37. 1:52If you're like most people, you'll first choose enough water to last the trip,
38. 1:55and then as many diamonds as you can carry.
39. 1:58This is because of something called marginal utility,
40. 2:01and it means that when you choose between diamonds and water,
41. 2:04you compare utility obtained from every additional bottle of water
42. 2:07to every additional diamond.
43. 2:09And you do this each time an offer is made.
44. 2:12The first bottle of water is worth more to you than any amount of diamonds,
45. 2:16but eventually, you have all the water you need.
46. 2:19After a while, every additional bottle becomes a burden.
47. 2:22That's when you begin to choose diamonds over water.
48. 2:25And it's not just necessities like water.
49. 2:27When it comes to most things, the more of it you acquire,
50. 2:30the less useful or enjoyable every additional bit becomes.
51. 2:34This is the law of diminishing marginal utility.
52. 2:37You might gladly buy two or three helpings of your favorite food,
53. 2:40but the fourth would make you nauseated,
54. 2:42and the hundredth would spoil before you could even get to it.
55. 2:45Or you could pay to see the same movie over and over until you got bored of it
56. 2:49or spent all of your money.
57. 2:50Either way, you'd eventually reach a point
58. 2:52where the marginal utility for buying another movie ticket became zero.
59. 2:57Utility applies not just to buying things, but to all our decisions.
60. 3:01And the intuitive way to maximize it and avoid diminishing returns
61. 3:05is to vary the way we spend our time and resources.
62. 3:08After our basic needs are met,
63. 3:10we'd theoretically decide to invest in choices
64. 3:13only to the point they're useful or enjoyable.
65. 3:15Of course, how effectively any of us manage to maximize utility in real life
66. 3:19is another matter.
67. 3:21But it helps to remember that the ultimate source of value comes from us,
68. 3:25the needs we share,
69. 3:26the things we enjoy,
70. 3:28and the choices we make.