Diluted Value, A Concept Most Don’t Understand

Many people think in terms of absolutes. Something’s either good or it’s bad. They either got ripped off or they didn’t.

For example, I purchase a $250 online course and they either take my money and run or they make good on their promise and deliver a course, whatever quality it is.

If we take it a step further, most people see three possibilities: Bad, Middle, Good.

For example, I hire a carpet cleaning service and they didn’t take my money but they also didn’t meet my expectations so I see them as ok.

That’s where the population maxes out in how they analyze value. Many are binary. The deeper thinkers recognize a third tier. And that’s our value analysis status.

And that’s enough to get by for the vast majority of transactions because most transactions have a lower dollar figure. Most products and services we buy are under $250 so our evaluation is never that off. It can’t be, there’s only a $250 total range.

For example, if I buy a set of headphones for $100 and they work decently for 8 months and then stop working, I got roughly $67 out of them if we calculate most $100 headphones last a year before they stop producing good audio.

So I’m out $33. It’s a relatively big loss but in terms of the dollar amount, not a huge deal.

Bigger Transactions

The problem is when we engage in bigger transactions where even a slight skew in value is a big hit.

For example, let’s say I go the car dealer and they get me good. I go to buy a car for $20,000 – and I know that’s what Kelly Bluebook says the car is worth – but between bloated financing and hyper inflated upsells, the total I’ll pay for the car is $30,000.

We’ll assume a standard financing agreement would have run $2,000 but I’ll end up paying $5,000. Let’s also say I got upgrades worth $2,000 but I paid another $5,000 for those because I had no clue what they were throwing at me.

This would be an enormous value dilution ($30,000 paid for $24,000 received or 80% total value) but most Americans can’t recognize it because they don’t take their analysis that far.

It’s a lot like a $5 for $4 exchange except for this time it really hurts because it’s not a $1, it’s $6,000.

Murky Reciprocated Value

Gamesmanship afoot at the car lot is no surprise to us. But insurance and formal education are two purchases where we really don’t know what the hell we’re getting in return but we take the plunge out because of risk aversion and engrained acceptance.


Insurance is good in theory but not in practice.

In theory, a large, well-funded company pools together money and then pays out money according to an individual’s plan once the need arises for that insurance. Of course, the insurance company would calculate however much it needs to take in to both payout and profit.

Let’s say we pay in 100% and 80% of the money is allocated for payouts and 20% goes to the insurance company for its efforts in running the operation.

That 20% isn’t value dilution. It’s the money necessary to run the operation.

The problem is insurance companies drive to lower their costs at all costs and this leads to value dilution because our risk is not offset like we’re paying it to be.

Let’s say I pay $1,200 a year to fully insure my home and this is the going market rate for fully insuring in my area. I expect to be fully covered in the event something happens.

A storm strikes and my roof requires $4,000 in repairs. The insurance company fights me on the cost and I end up settling for $2,500.

That’s a major value dilution. I paid to get full coverage and yet I only got 62.5% coverage. I didn’t get 1:1, I got a 37.5% haircut.

And this happens all the time. Part of it is risk aversion. Another part is we don’t assess the value proposition until things turn south.

Related Post: Everything is Until it Isn’t


College is even worse. The value dilution is so great, it’s a scam.

Imagine borrowing $40,000 over 4 years to get an education that adds next to nothing in terms of your prior marketplace worth.

So, you were a waiter at $12/hr going into your philosophy degree and the best you can do after graduation is $12. But the kicker is now you have to pay $300 a month in student loans with the juice rolling.

What kind of value would you put on that college education?

Sure, you had a fun time and you met some awesome people so that has to be worth something but $40k? Couldn’t you have just made friends with someone on campus and got all the partying without the student loans?

But ascertaining the value of college is a lot more hazy to us – or at least we can make it as such.

  • What if I get a really good GPA?
  • I’m undecided on my major so I’m just going to feel it out.
  • I’m going to network more than those people who don’t get a job.
  • This is my passion, someone told me to follow my passion.
  • My parents will be so proud of me.
  • My college is one of the best and they have ties to local businesses.
  • The college put out strong post-graduation job rates (except you don’t know they skew the hell out of them).


You can easily gather the more generic raw data and calculate a very strong approximate value (I’ll guarantee it’s horrible) but nobody does that.

Wrap Up

In the aggregate, our micro/small transactions really do add up but 1) we’re usually not that off on regular purchases (ie we know a burrito costs about $7-8) and 2) even if we miss the boat, it’s on smaller, less frequent transactions that don’t destroy us (ie how often will I overpay $10 on a $50 dog crate).

Thus, being off on ordinary, smaller transactions impacts us negatively but not horrifically.

What’s killer is when we use the same precision and methodology to evaluate large purchases as we do small.

It really hurts to be off $1-$100,000+ when you make, what, $30-$45k.

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