The Relative Theory of Value: For Dummies 3 (Information Asymmetry)

  1. relative value of a good to a consumer = r(inherent properties of a good, state of a consumer)
  2. Any attempt at evaluating r is dependent upon the subject/person, thus creating a subjective valuation that is dependent upon both the quality of the information and the intelligence of the person attempting to evaluate r. in other words subjective value is an estimation of relative value.
  3. It is not necessarily the case that the consumer has an advantage in determining relative value.  In most cases it is true that the consumer himself is privy to the “state of a consumer” variable.  This information asymmetry would give the consumer an advantage in determining relative value if the information of the inherent properties of a good and the intelligence to process all information were equal.  It is also possible that information asymmetry can exist with respect to the “inherent properties of a good”, and also possible that the intelligence of the individual can make up for any deficit in information or provide an advantage to the person making a subjective valuation of relative value.  Therefore the accuracy of the subjective valuation (how close subjective valuation is with respect to relative value) is dependent upon the quality of information of BOTH variables and the intelligence of the subject.
  4. So any deficit in one variable can be compensated for with a surplus in information of the other variable and/or a surplus of intelligence to process all pertinent information. And any deficit in intelligence can be compensated for with better information of the variables that determine relative value.
  5. The existence of relative value is why, we as consumers sometimes defer choices to experts by giving them information about ourselves so that we can better maximize utility by selecting the good with the highest relative value for our purposes.
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