Jesse Rodgers

Instructor: Malcolm Campbell

UWRIT 1104

April 6th, 2017

Valuation processes: How is Value Determined?

Have you ever wondered why your friend bought his nasty yellow car, or why he

earnestly believes his car is fantastic despite it resembling a moldy yellow cheese? Well I have.

We all need to understand the thought processes of others since we have to live on a planet with

eight billion other humans, so we should familiarize ourselves with how people value goods. A

person better able to understand and estimate why and how much others value something will

have an edge in negotiations or maneuvering through everyday interactions with other people.

My topic dwells in the field of consumer psychology, and focuses on consumer valuation.

Typically, consumer psychology focuses on why consumers consume. However, my focus is

squarely on how they decide to consume. To consume or not to consume? Value is key to how,

why and when consumer consumes since value determines motivations and urgency. A common

misconception exists insisting that people can only value tangible goods. However, in consumer

psychology any religious idea, political idea, or consumer good, which is be consumed when

accepted by, people. A cleric produces a certain brand of religious rhetoric his churchs patrons

consume. Essentially, anything that is accepted by a person is consumed, and anything that can

be consumed can be valued; Therefore, a person who consumes uses some valuation system to

ensure they are not consuming something potentially hazardous, fallacious, or a rip-off.
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I intend to discuss and explain the connection between simplistic valuation, meaning

evaluating shoes, shirts, dresses and other consumer goods. With the methods of financial

experts to determine the significant differences in understandable terms. Since valuation exists as

an abstract concept, I will use a question or model to describe valuation. First off, do college

students evaluate consumer goods in the same way financial experts valuate stocks?

It is widely held that financial experts take much deeper insight into stock trades than a

college student deciding on a dress to buy does, her primary motivations may be purely aesthetic.

She may purchase a blue dress because it matches her eyes. On the surface, it seems that college

students like the girl mentioned above value carelessly and a financial expert would take a more

calculated approach. We can call into question whether financial experts take a more calculated

approach since, according to Business in Action by Thill and Bovee, most indices, hedge funds,

and mutual funds do not beat the market. Despite being managed by so-called financial experts.

The function of Indices, hedge funds, and mutual funds is to perform at or above the overall

market. The idea that most of the financial managers fail to meet their targets brings their

reliability and carefulness into question. Does the failure of the experts mean their valuation

methods are similar or identical to average consumers? Maybe financial experts use the same

valuation system as the college student and receive just as unreliable results. Could the experts

failure imply that general experts are not societys panacea to its ills?

Human interference may be the cause of their chronic underperformance according to

Martin Shkreli, a former hedge fund manager at MSMB capital. Often an investor is better off

gambling their money on random stocks than placing it with a hedge fund manager (Shkreli).

Shkreli lost over six million dollars in assets for his investors. Accusations of securities fraud

related to his hedge fund lead to Shkrelis arrest. Instances like Shkrelis show how financial
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experts can often cause investors to lose more money than if they would have become day

traders and managed their own investment portfolios. Since, empirically, the performance of

hedge funds is lower than market performance overall despite being managed by so-called

financial experts, an investor can honestly ask are these guys really better decision makers than

themselves. Since financial experts valuations of stocks lead to chronic underperformance, why

does society value the opinion of financial experts?

College students represent the average consumer, at least in the way they value goods

(Roberts 296). Most college students do not make judgements on the future or current value of a

good like a financial expert, yet they purchase goods like everyone else and achieve typical

results of their decision-making. Since college students decide value similarly to normal

consumers, I examined their decision-making processes to determine if regular consumers

undertook the same dialectic processes of financial experts.

Thought processes that involve multiple standards and facets is referred to as dialectic

thinking (Roberts 218). For example, a consumer deciding what toppings they want on his pizza

might consider whether he wants a fruit, vegetable or meat, and then he may decide if the

topping will be sweet or hot. Creating multiple criteria and measures to help make a decision is

an example of dialectic thinking. The answer would prove useful in constructing a valuation

model that respected human nature. Within consumer psychology there already exists models to

describe consumer decision making processes. One such model the general model of consumer

decision making is shown below. Examining whether college students and financial experts keep

to the same basic framework will help determine if they use the same valuation methods.
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Stimulus Situation

Cognition Learning
Perception Emotion Motivation
& Memory Association

Intention

Social Context

Behavior
Cultural Context
Fig. 1.1 A general model of consumer behavior by Mullen and Johnson

When economists, consumer psychologists, and mathematicians try to explain complex

concepts the use of math makes for shorter, simpler, and more conceptually visible answers

(Rajesh 11). Throughout this paper, I will use two models not only to save time, but also to

demonstrate my points. I will use anecdotal examples to explain my meaning, one example will

be in financial contexts, and the other will be practical context for the average person to

understand. College students share the same consumer valuation methods as regular consumers,

as opposed to professionals like financial experts (Roberts 287). Financial experts use a technical

analysis that involves stats and math, while normal consumers just wing it in heads and do not

draw out long models to make a decision. I will also apply the model to financial valuation to
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determine how if at all similar experts and average people determine the value of a good, asset,

long-term or short-term security.

Imagine a financial expert and college student are sitting at desks opposed to each other

and go through the processes of Fig 1.1 The student and financial expert will purchase Coca-

Cola a bottle and a share respectively. All of the Fig 1.1 measures led to each other or the

intention to consume. The first step of the process is the stimulus situation, which is the initial

force that drives an individual to realize they want to consume (Brian 3). When a financial expert

consumes they actively search for a stock that fits the criteria they need for their portfolio i.e. the

right industry, the right track record, good leadership, and acceptable profit potential. Financial

experts receive their stimulus situation through intent. On the other hand, the college student

experiences a sudden thirst, and searches for a drink to satisfy that thirst. The sudden thirst is the

stimulus situation.

Next, perception is determined by the reputation of the product. Perception is rumor

based on the opinions of others. Does the product have a bad reputation? Does the company

push for ruthless profits? The financial expert looks to analysis to determine the companys

reputation; he also looks to whether others are buying Coca-Colas stock. The college student

remembers their experience with Coca-Cola if they have any, and recalls the negative or positive

experiences of others with the products. Next, perception leads to an intent or maybe a different

measure of the product.

Cognition & memory is the remembrance of how the product affected the buyer in the

past if they purchased the product. Learning association measures the relative change as a result

of the product. Does the consumer see the world differently because of the product? Emotion is

the effect that being happy or sad has on ones propensity to consume. Motivation is whether the
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consumer has the will to follow thru on their purchase. Cognition & memory for a for a financial

expert may involve closely examining the past performance of the stock.

One of the most volatile entities of value is stock. A stock is a share of a corporation,

which derives its value on the stock market from supply and demand, which, to investors, comes

from the potential of future value; In terms of dividends. Dividends are divides of the profits

given to shareholders. One of the most widely held theories of financial experts is discounted

cash flow.

The validity of mathematical models rest in the assumption of how value is

communicated. For example, a particular model may be based upon discounted cash flow, which

states a securities underlining value is the combination of its future earnings. Thus, the

mathematical model, discounted cash flow is just the addition of all future cash flow (i.e. sales,

tax cuts, and dividends). For all financial experts the ability to guess the values of the variables

of the discounted cash flow model, is the ultimate goal (Shkreli).

Discounted Cash Flow:

Using equations can help an investor, student or whomever needs to estimate the future

value of a security. Let us put the discounted cash flow model to the test by using it to determine

the value of shoes. Let us assume the ultimate purpose of buying shoes is to have something to

cover your feet every day. Then, everyday would could wear the shoes would be a benefit of
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those shoes like a dividend. So, the value of a security or in this case a shoe is only worth the

sum of all its dividends. The shoe is then only worth the combination of days it can be worn until

they are unwearable. The math works the same for the security and for the shoe. That means this

model is versatile and can be and is probably used for different things besides finance.

Humans are complex and often puzzling creatures, we may value something more

because of its color, cost, or utility; but, we always use some sort of value metric in our

decisions. In this paper we looked at the valuation method of average consumers versus experts.

We used college students as representations for average consumers, and we used financial

experts as representatives of highly educated people. By utilizing two valuation methods using

financial and everyday examples, we examined whether financial experts and college students

used similar or identical methods of valuations. The amount of overlap between in dialectic

processes involving valuation between financial experts and college students was surprising, and

indicates that humans regardless of education level use the same methods. However, the more

educated are more efficient at using any form of valuation methods because they have more

experience.
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Glossary
Mutual Funds: A collection of investments that are managed by a hedge fund manager.

Index: An investment program that aims to match the performance of a specific industry.

Stock: A share of a corporation that represents ownership.

Bond: A representation of debt that can be sold and traded.

Dialectic Thinking: A define process to figure out a problem usually involves many different

metrics and standards.

Works Cited
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2017. Print.
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