Value Paradoxes and the Time Value of Value

Abstract

Neoclassical economics equates the concept of value with utility, which is estimated from measures of stated or revealed preferences for various offerings. Value is typically represented by concepts such as willingness to pay (WTP) and gross domestic product (GDP). However, researchers have uncovered a number of paradoxes that demonstrate how preferences and WTP often have surprisingly weak correlations with important outcomes such as subjective well-being (SWB). In simple terms, what people think will make them happy often does not make them happy, suggesting that neoclassical conceptualizations of value may be flawed, or at least shortsighted. We review value paradoxes pertaining to GDP, income, labor, and preferences. We explain the paradoxes through a model that delineates related yet distinct manifestations of value: value potential (a stochastic forecast of future changes in SWB) and value realization (actual changes in SWB). Value realization is shown to have transitory and persistent components. We model the relationship between value potential and value realization with a time value of value equation and describe how the value paradoxes can be explained by flaws in affective forecasting. The time value model uses neoclassical and happiness economic literature to explain how value is transitory, stochastic, and multidimensional.