Valuation: thoughts and thumb nail sketches
What’s it worth to you?
We are continuously making value judgments about people, events, actions, things. We try and predict and estimate the future value of all sorts of things, assigning values that would shape decisions tomorrow, next month, or even years later. Our past life events and the people also subject to valuation.
Valuation is a key ingredient in decision-making. How do we make those valuations, or more to the point, how does the brain accomplish valuation computation? Valuation in one form or another has been studied for many decades. Most recently the study of valuation has been rebottled in what is called behavioral economics. Clearly how we assign values and then behave has been of keen interest to students of brain function. Ultimately, like so many other cognitive problems we want to move beyond descriptions and learn how the brain carries out the array of valuation functions.
The relevant history of valuation began with an interest in the role of the brain reward system’s role in determining behavior. This is a theme in the study of behavior that goes back for a least a century. The science of reward has been studied in all sorts of animals, using a wide array of techniques include behavioral science methods, by creating brain lesions in the brains of animals, neurochemical studies, stimulation of brain regions related to reward, recording and tracking brain reward related activity, clinical studies of reward related brain dysfunctions. Similar methods have also been used to study anticipation, or prediction of future reward.
Despite thousands of studies the neuroscience story on reward remains vague and very incomplete. Not a surprise given the complexity of the valuation problem. That should not stop us from considering all sorts of phenomena in everyday life that illustrate the impact of valuation in the here and now and in the future.
So….how do we decide what something is worth? You can fill in all sorts of blanks to illustrate specific situations in which this question could be asked…. like ….what would you pay for a widget, or would you trade a widget for a bag of marbles, or do you think a widget now is worth more than a promissory note of 20 widgets next month. Is a time-share in the Bahamas a good buy now or should we consider other places instead. How hard would you work to get a malted milk, or a heroin hit. Should you ask for a divorce and marry your mistress. Would a bear in the forest try to get to a honeycomb while the bees were swarming about? For humans, and perhaps for bears, these questions all enlist conscious thinking, explicit thinking, thinking with awareness, thinking that is relatively slow and deliberate. No doubt you realize that we make all sorts of important valuations based on thinking that is totally outside of awareness, decisions based on our history, our genetic heritage, the context of the here and now. We can make rapid valuation judgments that seem to come from our gut rather than from the front parts of our brain. All of us make all sorts of judgments, decisions based on thinking that is implicit, outside of awareness that emerges rapidly and spontaneously, out of seemingly nowhere and seems to then grab our attention. For that reason valuation is often not based on what you can tell someone about the basis of your judgments and decisions but what you value can be ‘read’ by others by what you do.
While the solid scientific evidence that explains various valuation remains illusive we do have some neuroscience tools that provide at least some clues, partial answers to questions like the following dozen of many:
- How does the reward system in the brain operate alone and in concert with other brain networks (such as memory, control functions) that determine our behavior?
- What is the biological basis of valuation in terms of neuroanatomy, physiology, chemistry, genetics.
- What is the neurobiological basis of rapidly deployed valuation functions vs. those that are much slower and deliberate
- Are there qualitatively different types of valuation that involve somewhat different brain circuitry?
- What are the neurobiological metrics that determine the comparative value of immediate value vs. the valuation of a ‘promissory note’ for future goodies? How should we measure valuation?
- What is the neurobiological basis of valuations attached to past event in comparison to valuation in the here and now?
- What are the developmental factors that are the basis of changes in our valuation processes?
- How can we understand the determinants of a breakdown in adaptive and useful valuation functions in a wide array of disorders and conditions such as drug abuse, chronic stress?
- What is the role of valuation in all sorts of other complex mental functions such as those that are the basis of emotions, learning, problem solving, and individual and interpersonal interactions.
- Can valuation functions be tuned to be more effective through training?
- How does what we know about validation also account for our experience of loss?
- How do we account for individual and cultural, societal differences in valuation for similar objects, events, people?
This distinction between valuation that is made with and without awareness covers a good deal of what we value including how we respond to losses. For example, it is common for folks to refuse to sell a stock that they bought early and is now worth far less. Perhaps their inability to make a decision in that is in their best interests can be driven by feelings about loss rather than potential future gain, or an aversion to losing what someone worked for and their past hopes for a different outcome, or their childhood experiences of lost valued objects, people, opportunities.
Valuation of the past, present and future
(Much more needs to be done here including adding some stories and vignettes)
Obviously the opportunities to examine our valuations are virtually endless. I mentioned just a few examples of above but the list can go on and on.
Valuation in the present: How can we understand the behavior of a young heroin addicted mother who totally neglects her baby in her zeal to get her next fix. Is it that the heroin hit has a much validation than her baby or is it that her baby has diminished valuation, or that her thinking is driven fast unreflective emotional decisions and almost out of awareness.
How would you value your wife, a friends wife, your mistress or for a your wife, her secret lover.
All people are not equal
Do you value white Europeans more than black Rwandans (thinking back to our intervention in the Balkans but not during the Rwanda genocide? Valuation has certainly played a role in immigration policy (past and present). For many decades the preferred immigrants came from northern Europe (England, Scandinavia, Germany, ….) while folks applying for immigration who came from southern or eastern Europe were placed on the bottom of the value list of the preferred future citizens. That policy persisted even while Nazi Germany targeted the non-preferred people (like Jews) for murder. Fast forward to today and we again persist in making value distinctions between immigrants from central and south America and the Caribbean (Spanish speaking folks with a bit more skin color than is proper) and northern Europeans and, surprisingly Asians whose language and features also are different from those who decide who is in and who is out. I guess you have to keep up value in a society whenever the opportunity arises.
Valuation of the past: Was the time you spent in graduate school as wonderful and full of rewards as you now remember it. You have told me that your climb up a treacherous mountain in the Rockies was one of the high points in your life (leaving out that you almost fell of the mountain).
Valuation of the future: If I fudge some of the data on my ground breaking novel genetics of diabetes research I will be assured not only tenure but an immediate recognition as one of the leading genetics researcher. But if I am caught then….what are the odds. For this example can substitute insider trading, having an extramarital affair, distorting my past history in talking to friends, on a resume…..
Would you value more successfully losing 20 pounds or a bonus and recognition for outstanding job done at work?
How much would you trade for getting rid of your adult onset diabetes, and would you forgo the french fries and trade that in for a scene in which your young cute assistant at work wraps her arms around you and pushes and squirms against your aroused prick.
Would you give up French fries, ice cream and fried chicken wings if it meant losing those 20 ponds and looking much more attractive, sexy, even erotic to all sorts of women including those at work.
Could you actually push the french fries aside despite voices in your head and in your brain reward system telling you that a bird in the hand is worth a bunch of birds in the bush?
How much is a cold beer on a hot day at a sports event worth to you and how do you value your son making the middle school honor roll and would you value that more than if it was your daughter’s school achievement. Valuation can be considered for almost anything but value is also context-dependent a cold beer at a football game with the temperature below freezing is not as attractive as it would be a baseball game.
Knowledge and language in the marketplace
Information has value especially if you know something about what is commonly considered of marketable and loads of others don’t. I guess this is part of the truism that knowledge is power. Thousands of years ago, in all sorts of societies and civilizations, some folks who had power knew that insider information is part of what made them powerful.
Information has value especially if you know something about what is commonly considered of value and loads of others don’t. In a beautifully written article in the Aug. 4, 2014 issue of the New Yorker, John Lanchester describes how Money Talks starting with a cameo of ancient Egypt and the point that people have always known that information is valuable. The Egyptians, especially the priest class of that ancient society, knew what the rest of the society did not know. They had and used devices that could predict the rise and fall of the Nile waterway. Water was the super valued commodity in ancient Egypt and the annual Nile flooding was the deliverer of the goods. Too little and many Egyptians starve, too much and the flooding destroys the crops and starvation is also the result. They Egyptian priesthood had enormous power based on their Nilometer predictions, knowledge of the Nile scenario. Today financial institutions have a language they use to describe the value of their products that are meant for the masses but they have the knowledge that gives them huge advantages in understanding the value of what they are peddling in the marketplace.
What is the value of a 1962 Mickey Mantle baseball card?
How much is a baseball card that is dated 1962 and signed by Mickey Mantle worth? If I kept the card for 20 years how much would it be worth. What would be its market value if the card has a ketchup stain in the right hand corner and is a bit faded (all true)? I live in Detroit and not the big apple. Would that affect the value of the card?
At this moment all this matters less than what my doc just told me. I have been turning yellow and it turns out that my liver disease has jumped onto the express lane and I won’t see the New Year in. I guess I don’t have to be concerned about the value of the Mantle card 20 years from now. So now what? I can’t stand my wife and am also not crazy about my kids so do I leave them my collection of baseball cards worth I don’t know how much?
I guy called me from Boston. Don’t know how he got my name and phone number. Heard this gravelly voice over the phone after no intro or anything. “Hey, I hear you got a 1962 signed Mantle card. If it is in ok shape I will buy it from you for $800.
So I told him, “Yeah I got that card and lots more, and who are you anyway, and how did you come up with an $800. Number, and how did you get my number.”
So he gave me an answer to one of my questions but that is it. “Look, I start off all of my offers for buying cards with one of several lucky numbers. For rare cards $800 is my lucky number. So if you are interested in a deal call me back at 617-943-5482 and ask for Mike.”
I told him I would get back to him but I never did and I figured he didn’t expect me to either. We both were playing the game of ‘how much is that doggie in the window?’
The call did get me to think about the value of the Mantle card and all the other cards in my collection. What if Mickey Mantle’s son contacted me and offered to buy the card? Would I sell it to him and for how much or maybe I would just give him the card because I loved seeing his Dad play even against my Tigers.
Value. It takes a lot of care to maintain a collection of baseball cards. You have to get the right kind of binder book with loads of pages of plastic sleeve pockets. Each card has to be nestled into a pocket and then the pocket has to be sealed and underneath you have to record lots of info like how much I paid for the card, the date of the card, and stats of the player whose picture appears on the front face of the card.
I wonder how much I can get for my entire collection of 136 cards. Would Mantle’s card up the value of the entire collection? Maybe when I start to feel really shitty I will just give the whole collection to our little league baseball team. Bet they will get a kick out of it or maybe they will turn right around and sell it maybe even to Mike in Boston.
Establishing value when purchasing or selling stocks
It is certainly true that the value of a traded security keeps changing. Rarely is the value of that security based on the current assets (minus liabilities of the company whose stock is being evaluated in the market place. We all know that and also know that stock value can be effected by many factors such as, rumors, hedge, funds (i.e., shorting a stock), promotionals, your cousins’ assurances, short and long term history, legitimate and not so legitimate ‘cooking’ of company books, rumor, product claims, and lots more variables. The question then remains how do we place a value of rumor, the impact of herd mentality that collectively finds a security attractive or unattractive. In addition, how do you value a stock that you own that has lost half its value and may never recover its previous value? No doubt you know that many of us are loss aversive and so total dollars already lost obscures judgment about the current subject value of the stock that has disappointed you.
All of this is common knowledge but…my point is that all of these factors, when taken together can form the basis of some effective models and equations for establishing value in a manner that ‘works’. I would bet some of these models are already in use by mathematicians who have chosen to work for financial institutions instead of academia.
Little bits, pieces, thoughts about valuation
Lost beret
It is not like I lost a limb, or my wallet, or my way. Nevertheless I mourn the loss of my beret that I bought just 6 weeks ago in a small village outdoor market in Burgundy France. I needed to replace a ratty beret that I wore for years, one that used to be my father’s. When I lost that one and looked all over to try and find it I finally came up with a mental image in which I would buy a new beret after acknowledging the burial rights of the old one.
Actually I had another hat that could easily pass as a beret but wasn’t and so that was not going to do as a stand-in for the beret I lost. My son gave me that one and I did wear it some of the time but knew, as I was wearing it, that it wasn’t the real McCoy.
So here we go again. Have to find a real beret one that was made in France just like my father’s and the ‘new’ one that I have to replace. It was such an early unexpected death, just weeks old, which reminds me of the dates on the gravestones of some of my past generation relatives buried in German village (in the province of Baden), past kin that only lived weeks or months before they died (a common enough occurrence a century ago). Of course losing a beret should not be a big deal but then again loss and grieving for a lost object need not be rational like so much else that our minds conjure up that would appear to not make sense.
Our history, knowledge forms intricate networks of interconnected events, symbols, images, thoughts that are the basis of our cognitive life. Everything we know including what we don’t know we know is connected in so many ways. Often those connections defy logic but nevertheless make sense based on who we are.
So why is it so compelling that I lost a beret that can be easily replaced for $20
Sheila lost her husband
“What happened? “ Before Shelia could answer she broke down in tears, and kept sobbing, gagging on her tears, shaking. Laura, her neighbor put her arms around her and asked again, “What happened? “
Shelia screamed back over and over louder and then in a whisper, “I lost my husband. He is lost forever. Not coming back, never. All berceuse an idiot did not secure his bike to the back of his car. The fucking idiot killed Jim, killed him just as surely as shooting him in the head. Why, why, Jim would be driving behind the asshole when the bike came through his windshield and then…. Laura he is dead, killed, murdered.”
Months later Sheila was still in shock. Her kids and two young grandchildren went back to Cleveland but called everyday. Cindy her 4 year old granddaughter would get on the phone, and in a sweet soft voice would tell her not to cry that she loved her very much and would miss grandpa but was so glad she could have her grandma continue to bake the best chocolate cookies in the world.”
Fast-forward, a year later …the insurance settlement was still neither complete or totally inadequate. Even an idiot would realize that an award of &125K was crazy, insulting.
Sheila was helped by the slap in the face of the insurance company offer and got so angry that her sadness lifted in the wake of her fury.
I (Laura’s husband) still don’t know the progress being made in negotiating a different kind of settlement. I do know that Sheila contacted a specialty lawyer one who was well known as effective in cases like hers because he didn’t just know the law but was an expert and trained in establishing the value of a lost life (for insurance purposes).
While I don’t know much about how the lawyer calculates the lost value of a life lost, I do know some of the stuff he was considering in his complex mathematical model of loss. I know a lot of math but not the type that was used for calculating value in situations like what is the loss value of someone who has died?
The value equation starts with the usual preamble; f (u, v, x, z, …..) = { ∑ u + µ……) and is certainly not linear. The variables used to establish value are more elaborate than the usual such as continued life-long earning lost by the deceased; economic loss implications for minors, adults, but also measures of impact of emotional distress, communal loss, satisfactions denied. I do know that many of the parameters of these measures of value lost were established based on empirical studies in the laboratory of neuroscientists studying brain response to all sorts of death related scenarios.
I should learn more about this work. Sounds interesting but in the meantime, Jim is dead, Sheila has turned grieving into anger, the proposed insurance award has now topped 1 million and the guy driving the car with the bike that dropped from the rear rack and killed Jim was convicted of involuntary manslaughter and was given a suspended sentence.
You got academic tenure then lost it on the way to the fraud bank
Rolf sat alone near the window of the faculty conference room. The blinds were drawn and it was as if it were near nightfall although the clock over the door pointed to 10 after 2:00. The senior faculty had all left a half hour ago. None of them, except Jim, said a word to Rolf as the shuffled out, heads down, gloomy. As Jim passed him sitting there looking at down at the floor Jim said just word, ‘asshole’.
Rolf continued to sit and rock back and forth, hugging himself, mumbling over and over, “Now what, Why? Why did I do it? Why was I so stupid? Where can I go and what can I do and where can I hide, and what about Millie and the kids, and why did I do it, and..” and he kept running the same rambling audio over an over.
Rolf thought to himself but not aloud, “Why wouldn’t they look at him and, despite what he did, no one touched him, said something sympathetic and none of them seemed even angry, just resigned, maybe exhausted like the feeling after an extensive spring cleaning, and he was the garbage.”
Could he blame them for ‘singing’ like a an ancient Greek chorus, “ Death, banned to a cave in hell, cheater, liar, beast”
He had disgraced himself, the department and the University. What was he thinking when he falsified the genetics of diabetes data? How could he have made that decision to publish a paper that he knew was going to draw lots of attention and of course the findings were such that it was cinch that attempts would be made to replicate his results. After all he seemed to have uncovered the basis of the most common form of diabetes and those findings would open up the discovery of a cure for that disease.
So….what do we have here? An almost prominent diabetes researcher shredded his career by fudging his data and publishing his ‘impressive’ results. He had written a highly visible paper that described the genetics keys responsible for the most common form of diabetes. He was desperate for tenure and was running out of time and then made a huge miscalculation by assuming that he was not going to be found out. He calculated the odds of that happening incorrectly. His findings were so important that it was highly likely that other scientists would try and replicate his results. He valued fame and tenure and undervalued the sense of loss of value by being humiliated and having his career end up in disgrace.
Similarly Madoff figured he would never get caught. He successfully bought the valuable experience of huge profits and the admiration of the famous and the already rich who wanted to get even richer faster than they had in their past. In time he was caught and how could it be otherwise. Madoff made valuation decisions that were faulty in the long but not short term.
You could argue that insider traders make similar valuation misjudgments.
A heroin abusing young mother puts her very young child at huge risk as she tries to get her next fix (that being the highest priority in her life). Does that mean she values her child less than most mothers or over values a heroin high? Valuations are incredibly time dependent. “Later, after I shoot up I will take care of little Lisa”
More material needs to be added, more thinking is needed and the post also needs some pruning. Will come back later and do all that.