Quantifying a Product’s Value
I‘m on a journey to crack the nut of personal finance. Personal finance isn’t just for aspiring millionaires; it’s for anyone who wants to build their life on a solid foundation. It’s incredible to realize how understanding your money will give you the freedom you’ve always wanted.
Over the course of my journey, I’ve stubbed my toe many times. I’ve made tons of mistakes and reflected on my mishaps time and time again. Through my toils, I’ve come to understand that personal finance requires you hear your logic over your emotions.
To manage your money well, you must make the best decision you can. A correct choice is one that maximizes gains and minimizes losses for the individual and society as a whole. It’s rare to find a human that consistently deflects their emotions and makes logical decisions. After realizing this shortcoming, it made more sense to reframe the problem. How can I make decisions quickly and logically, regardless of my emotions?
After framing the problem in this way, it was just a few days before I concluded this was a task destined to run on a computer. Computers have a significant advantage over humans; they are not affected by emotions. This advantage makes machines much better at making logical decisions than humans. Given a computer with algorithms that reflected my logic, it could more effectively make decisions that achieve my goals. The next challenge was building algorithms that reflected my logic.
First, I need to record my decision making criteria for various situations. To work out my process, I recorded my logic for choosing between items that solve the same problem. I decided that the basic building blocks of my logic were
cost, durability, and
cost— the dollar value of the item
durability— the number of months the item will solve the problem
effectiveness— how well the product solves the problem from 0-2
After I had defined the basic building blocks, I began to search for the relationship between them. I had the inputs for my algorithms, and I knew the desired output. To determine the formula for the value of an item, I recorded some of my principles that guide my thinking.
- Providing an effective solution to the problem increases the value of the item
- Higher durability makes the item more valuable
- Increasing effectiveness quickly diminishes in value
Ultimately, I built the following formula to compute a score based on my logic.
In practice, this formula can be applied to rank multiple items. Given a set of similar items, the item with the highest score is the most valuable. Take, for example, trying to pick between different pairs of shoes:
In this scenario, the Nike’s are the best value. They solve the problem with the lowest cost per month and effectiveness.