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Quantifying the unquantifiable

But if it's unquantifiable, why are you quantifying it?

Economists like to think that we can put numbers to anything. A lot of the time this is pretty easy. Cars on the road. People in a shop. The value of a transaction. That type of thing. Increasingly, economists are also tasked with valuing things that are difficult to value for decision-making purposes. Friendship. Community. Cultural connection. Concepts, emotions and feelings that mean something to people but don't typically sit in the domain of maths and modeling. While this isn't necessarily wrong, it is worth understanding, as monetisation of intangible benefits is a core method of investment decision making. I feel wellbeing valuation simultaneously overcomes but also reinforces one of the main limitations of decision making - that we often need a standard currency to make decisions.

If I were to ask you how much your friendship to someone is worth, odds are you'd think it was a funny question. You might say they are your best friend and you can't put a price on that. The value of friendship is interesting for economists in that it reflects wellbeing. In theory, the more friends you have the better your wellbeing. That increase in wellbeing has value and if policies can facilitate connections between people that is in theory a good thing. FYI, in a New Zealand study, the value of a new friend was estimated at about $460 per annum in 2017. I don't think this was talking about Facebook friends.

The value of friendship

That which is measured matters

Placing a value on abstract notions like friendship allows policymakers to more easily prioritise investment. Remember, that which is measured matters, and what matters more in policy than $$$? By placing a monetary value to investments that enhance wellbeing policymakers can more readily compare these with investments that enhance economic growth, like a new road or building. For example, if a $1,000 investment in a new road will generate $1,500 but the same investment in a club will allow them to expand and the members will make 5 new friends worth $2,300, the investment in the club is better. It's a forced example but you get the gist. Inherently it's about trying to make the best decision.

Wellbeing valuation uses a willingness to pay measures and surveys to understand the value. Essentially this boils down to asking someone "what would you be willing to pay for X"? With X being a friend, or a warm home or a cup of tea. There are more complicated methods of doing this but that is broadly what you need to understand.

Wellbeing valuation is useful in that it facilitates the estimation of factors that are important to people for modeling. A lot of the complexity inherent in decision making is swept away when you can, for example, suggest that an investment will generate $5,000,000 in benefits against $3,000,000 of cost. Often people don't have time to understand the detail. This information allows agencies to compare what they are getting against their budget and make decisions more easily because they can use a common currency. That is a good thing but it makes it difficult to recognise and balance competing options.

Investment is complex with trade-offs that can be hard to reconcile. It is important to understand these trade-offs thoroughly and not sweep them under the rug using an analytical method. Is the value of a new friend truly less than a new iPhone? What if we had to compare the value of a forest compared to a new building? We need to recognise the judgments in a decision and not rely too heavily on ranking against a common currency to make the decision for us. Tools such as multi-criteria decision analysis go some way towards addressing this issue but they often don't change the fact that if people see that one investment generates more $$$ than another, that investment will be preferred.

While this sounds complex all I am talking about is preferences. Do you want a chocolate bar or an ice cream? If it's a hot day, I'm guessing the ice cream. Odds are, you are willing to pay more for the ice cream on a hot day too. That is a preference that can be valued and analysed. Wellbeing valuation offers a way to navigate preferences and reflect intangible benefits in decision making. However, it makes it difficult to understand trade-offs in real terms and can feel unintuitive.

Thanks heaps to The Intelligent Economist for including Byte Size Story on its list of the top 100 economics blogs. It's amazing to be included alongside some phenomenal economists whom I have learned so much from.


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