By Jonny Lupsha, News Writer

A Patek Philippe wristwatch broke a world record by selling for $31 million, CNN reported. The watch is a one-of-a-kind Grandmaster Chime 6300A-010 that was made for a charity auction, and netted an all-time-high figure for a wristwatch. So how do we attach value to things?

According to the CNN article, the custom Grandmaster Chime by Swiss luxury brand Patek Philippe is the only one of its kind to be made. It features stainless steel; 18-karat, solid-gold dial plates; and a watchband of hand-stitched alligator leather. It fetched nearly double the previous record of a wristwatch, which was purchased in 2017 for $17.8 million, and the previous record for any timepiece, which had been set in 2014 by another Patek Philippe timepiece at $24 million at auction. The $31 million Grandmaster Chime reignites an age-old question: How do people decide what value to attribute to things?

The Value Curve

The Value Curve is one of the most compelling tools psychiatrists have developed in understanding economic theories of value. Not only did it help its founders win a Nobel Prize, but it’s almost childishly simple.

“This curve takes objective value on the horizontal axis—think something concrete and easy to measure, like money or horsepower or megapixels—and it translates that into subjective value, or how happy it makes us, or how much we like it,” said Dr. Ryan Hamilton, Associate Professor of Marketing at Emory University’s Goizueta Business School. “If we were completely unbiased in our assessments, this curve should be a straight line running at a 45-degree angle through the origin—we’d value one dollar as one dollar, and each additional dollar would be valued the same as any other—but that’s not the way our cognitive machinery works.”

Instead, the Value Curve is an s-shape, and it reflects how our brains turn objective value into subjective value.

Properties of the Value Curve

The Value Curve depends on three properties to explain how we place value on things, according to Dr. Hamilton.

“These three properties are: one, the curve has a reference point at the origin that serves as the zero point of the curve; two, the curve is characterized by diminishing sensitivity—that is, the curve flattens out, bending towards the horizontal axis as it gets further from the reference point; and three, the curve is kinked at the zero point, such that it is steeper in the domain of losses than it is in the domain of gains.”

Deciphering the Value Curve

Taking this one step at a time, reference points are first. “The basic idea here is that pretty much every evaluation we make is not made in absolute terms, but rather is relative to something else, some reference point,” Dr. Hamilton said. “Reference points are also why sales promotions always helpfully tell you what the retail price was before they discounted it. If you were able to evaluate the lower price in isolation, you might not even know that it was reduced, but with the previous price there to serve as a reference point, you’ll know just what a good deal this is supposed to be.”

From this reference point, the next notable feature is the “diminished sensitivity,” or the idea that the more of something we’re given, the higher the next increase has to be for us to register it. In other words, if you already come into more money than you could possibly spend in a lifetime, would 10 percent more really make you 10 percent happier? Apparently not.

Finally, comes “loss aversion,” the third property that Dr. Hamilton mentioned, regarding the kink in the curve.

“Loss aversion describes the fact that people tend to be much more sensitive to losses than they are to gains of equal magnitude,” he said. “Put in concrete terms, losing $10 feels a lot worse than winning $10 feels good.”

Dr. Hamilton gave the following example: If someone offered you a chance to win or lose $10 based on a coin toss that you’d call in the air, knowing there are equal chances to win or lose, would you be willing to take the bet? Most people wouldn’t, because we expect to lose by default. If the bet is $11 if you win and handing over $10 if you lose, most people still wouldn’t take the bet. In fact, he said, studies show that the “loss aversion rate” is about 2.1, meaning most people would need to be told they could win about $21 in the coin toss and still only lose $10 in order for them to take the bet.

This also ties into “sentimental value” of an object: We may want to sell a raggedy old teddy bear for $50 instead of $5 since it was our favorite stuffed animal in childhood. That bear got us through thunderstorms, nightmares, and more; the loss aversion isn’t the loss of a raggedy old bear but the loss of our childhood memories—maybe our childhood itself. Taking that into account, that $5 offer sounds a lot like an insult.

Coupons and deals are hard to resist based on our reference points; though due to our diminished sensitivity, we may not value the difference in savings between an item that’s 85% off and 90% off. However, our sense of loss aversion also keeps us guarded in terms of an item’s value. Depending on who you ask, the person is equally likely to say the mystery buyer who spent $31 million at auction on the Patek Philippe watch considered all of those factors intensely or considered none of them at all.

Dr. Ryan Hamilton contributed to this article. Dr. Hamilton is an Associate Professor of Marketing at Emory University’s Goizueta Business School, where he has taught since 2008. He received his Ph.D. in Marketing from Northwestern University’s Kellogg School of Management.