How the financialization of everyday life affects valuation

With greater financialization, the varied sources of non-economic worth gain prominence, but in different ways for buyers and sellers.

“Quantified assessments are increasing, and among them specifically economic assessments.” – Eve Chiapello¹

There is an interesting body of sociological research on the subject of the “financialization of everyday life” that many pricing and marketing practitioners may not be familiar with. This unfamiliarity needs to be remedied because this literature provides some powerful insights into topics that are central to pricing strategy and consumer decision making. In this short note, I want to briefly introduce the reader to financialization of everyday life and then quickly turn to considering how financialization has affected the valuation process of buyers and sellers using the example of residential houses. Throughout the discussion that follows, my interest is entirely practical. Rather than theory or abstractions, I want to present ideas that are practical, actionable, and relevant for pricing strategy.

Defining financialization

Let’s begin with a definition of financialization before exploring it in everyday life. In a general sense, financialization is the idea that financial concepts, methods, institutions, and markets have gained more prominence and power in society over time, and are at their zenith right now. (Whether this influence will increase further in the future is subject to furious debates².) Here’s a definition from a somewhat political source (we’ll ignore the politics and focus on the essence):

“Financialization refers to the process by which the financial sector—banks, private equity firms, hedge funds, stocks and derivatives exchanges, and other conduits through which money flows between those who have it and those who need it—takes up a larger and larger share of the U.S. economy, fails to allocate capital to its most productive uses, and increasingly results in the hoarding of economic, and thus political, power at the top of the income and wealth ladders. Financialization also can refer to the increasing participation of nonfinancial businesses in financial activities.”

The financialization of everyday life

The financialization of everyday life literature takes this general notion of the rising influence of finance and applies it to non-institutional social settings, or the so-called “emergence of financial subjectivities” in social structures³. It looks at the effects of all the different ways in which consumers have adopted the finance mindset in their lives (e.g., more willingness to take on financial risk as evidenced through the mainstreaming of online sports betting, buying options or meme stocks, greater and more widespread assumption of personal responsibility for one’s future financial welfare through investing for retirement), and generally speaking, a shift from “being passive to active financial subjects⁴.”

I will take this sociological idea and examine one of its psychological ramifications for pricing strategy here⁵. Psychologically, we can say an individual’s outlook is “financialized” when they use financial thinking in their life in situations where they didn’t do so before, at all, or to the same extent. In my own work on the motivations behind answering marketing and political surveys⁶, for example, I’ve written about how good information is really hard to get unless participants are compensated fairly. What used to be a voluntary, generous act of providing feedback a couple of decades ago, where the person typically enjoyed giving their opinion and felt valued for being asked by a company with no consideration of financial remuneration, is now simply seen as someone trying to exploit them and steal their productive time⁷.

There are many other examples of this shifting trend. People pay a rideshare driver instead of getting a ride to the airport from a friend. They subscribe to a dating site or shell out an even larger sum for a match-making service instead of meeting a romantic partner through family or work connections. The list goes on. It can be argued that the global spread of the gig economy and hustle culture⁸, where more and more of our social and community-based activities have been commercialized, and other areas of social life have been privatized (freeways to toll roads, concessions and experiences in national parks)⁹, not only provides evidence of the financialization of everyday life¹⁰, but has also led us to behave differently in significant ways, including how we evaluate the worth of objects.

How financialization of everyday life affects valuation

Now let’s consider what happens to the process of valuation under greater financialization, i.e., when an interaction full of abstract value, laden with unwritten and unspoken promises, obligations, and history, evolves into one where the economic aspects of the exchange gain a foothold and eventually become the main consideration.

In pricing, valuation is an essential process that occurs on both sides of every transaction in some shape or form. Sellers interested in setting the price assign value to the object using some process, or have it assigned for them. On the other side, buyers must assign value to the object as an integral part of their decision to buy. Buy if it’s valuable enough and a good value; otherwise, don’t. Note that buyer valuation may occur explicitly when the buyer thinks carefully about how much they are willing to pay, or implicitly when they make the purchase or walk away. In other words, valuation doesn’t necessarily mean that an actual value existed, was generated, or was negotiated. It simply means that it manifests at some point in the transaction through cognitions or actions on both sides, resulting in its consummation or termination.

We tend to put a box around valuation as a process of assigning economic worth, especially when looking at valuation from a pricing perspective. Many managers treat valuation and willingness-to-pay as synonymous. However, in reality, the valuation of an object may include any number of other types of worth that have nothing to do with money. These non-economic components of the total value are context-specific and can come from any number of psychological sources, such as attachment, positive or negative emotions, motivations like status-seeking, convenience, reassurance, and self-validation, and so on. Like beauty, value lies in the eye of the beholder.

In a non-financialized environment, non-economic sources of the object’s value remain separate from the economic sources of value, and generally are discounted or ignored entirely in the price determination process. In such cases, prices are quoted based on simple economic factors like demand and supply, and the functional value of the object.

For instance, if you went to a vegetable market in India or Kenya today, you would find the prices to be based on supply (e.g., mangoes are more expensive at the very start and end of the season, and cheaper during), and set with a simple markup on what it costs the seller. (Things would be slightly different if you were identified as a Westerner; then you may be quoted an outrageously high price and have to talk it down.) This form of economic-worth-only valuation often leads to one party in the exchange getting an amazing deal and the other party getting relatively short-changed. The party getting the amazing deal is the one that derives a lot of non-economic value from the object but doesn’t have to pay for it, typically the buyer. The party getting short-changed is the one who would have gotten a lot more, but didn’t consider converting non-economic worth into economic value, typically the seller¹¹.

Things are different when valuation is financialized. In this case, smart buyers and sellers will operate differently in line with their respective self-interests. For the seller, the most effective approach would be to bring as many different sources of the object’s non-economic value into the calculus when setting the price, and then communicating the bases of this valuation to the buyer. These sources may be legitimate, i.e., ones the seller genuinely believes to have value; or they may be contrived, as a means to convince the buyer they indeed hold value. The buyer, on the other hand, is interested in disentangling every non-economic source of the object’s value from the price as much as possible to get to the lowest possible valuation. The net result will be that prices increase over time as more and more non-economic value gets added to the valuation. I will use the example of house prices to illustrate these ideas.

House valuation and price setting

“You cannot objectively compare your house to anyone else's. It's like trying to decide if your child is prettier or smarter or cuter than other people's.” - Katonah, N.Y., homeowner¹².

Consider aggregate house prices over the past century and a half. The figure below shows indexed, inflation-adjusted house prices from 1870 to 2010 across fourteen countries, including Australia, the US, Japan, and mostly Western European countries, on the left, and from 1890 to 2010 in the United States on the right from the Knoll, Schularick, and Steger (2017) paper. Obviously, there are many explanations for these trends, some of which are explained by the authors (e.g., appreciation of land on which the house is built from 1950 onwards). But this pattern is also consistent with a financialization-based valuation story. From the 1800s until about 1950, in the era of relatively low financialization when many other things besides money governed people’s lives, house prices remained stable (in all 14 countries and in the US), reflecting mostly economic value. From then on, as the force of financialization increased, more and more non-economic drivers of value were added to home prices, leading to a steeper growth trajectory.

Source: Knoll, K., Schularick, M., & Steger, T. (2017). No price like home: Global house prices, 1870–2012. American Economic Review, 107(2), 331-353.

The decisions and actions of buyers and sellers in today’s housing market also reflect the general idea that sellers want to include as many non-economic factors in the valuation as they can, while buyers want (or are advised) to exclude as many non-economic factors as they possibly can, even when market conditions don’t favor these general strategies.

Consider a home seller who wants to put their house on the market. As a starting point, their realtor will assign value, i.e., derive an asking price, based on the current prices of comparable houses on the market. However, more often than not, the seller will adjust this recommended valuation higher based on how emotionally attached they are to their house, what they paid for the house, how long they have lived in it, and so on¹³. Each of these factors is non-economic in the sense that they have nothing to do with the market value of the house; however, they are financialized by the seller, and incorporated into the house’s valuation. In difficult markets, such efforts are formalized and institutionalized, as reported in a 2006 Wall Street Journal article by Ruth Simon:

“Traci Smith, president of Century 21 Smith & Associates in San Antonio, encourages clients to court prospective buyers with a letter explaining the intangibles that make their home and neighborhood so appealing, such as the fact that the kids on the block trick-or-treat at Halloween together.”

In contrast, someone interested in buying the house will start with the asking price but then try to adjust this amount downward by every functional aspect of the house (e.g., roof wear and tear, need to replace air conditioning, remodel the kitchen etc.). With a financialized mindset, they may also consider economic factors related to their personal situation (e.g., what mortgage they can comfortably afford, how much they will have to spend to furnish and decorate the house, etc.).

When buying a house, there is a strong tendency to bring emotions into the decision calculus. As David Brooks puts it:

“People generally don’t select a house; they fall in love with it. Part of that falling-in-love process is aesthetic: the sense you get within 10 seconds of walking into a place that it just feels happy and right. Part is aspirational: When people fall in love with a house, they aren’t really falling in love with the walls and the roof; they are falling in love with a beautiful vision of their future lives.”

Virtually every real estate professional will advise buyers not to fall prey to such non-economic factors in their valuation of the house as the fact that they really love the house, or that the house is popular and has many others interested in buying it, or even the fact that the house is staged. Is this effect of financialization a good thing? No, according to David Brooks:

“The process of house hunting focuses your attention on the wrong things. It focuses your mind on the features of the house rather than on the features of your life. Think of all the people who fall for some expansive far-off home, without counting the cost of a long commute. They’ve got a happy home but a miserable existence. It focuses on the features of the house, not on the social relationships that will happen in them, which is all you’ll remember decades hence. Choosing this or that house has only a moderate effect on joyfulness. The neighborhood you choose, and the social fabric you enter, is more important than the structure you adore.”

To summarize, financialization leads sellers to augment the object’s valuation in every feasible way, adding layers of psychological value over the object’s core of functional value. The seller builds this valuation step by step, like adding layers of butter cream on a cake. On the transaction’s other side, financialization leads smart buyers to strip away these layers of non-economic value from the object and judiciously refrain (if they can) from adding their own layers, trying to get at the core functional value contained in the object. As the pull of financialization increases, this battle grows ever more furious, with newer and newer layers of value added by the seller and more and more of it stripped away by the buyer.

1. Chiapello, E. (2015). Financialisation of valuation. Human Studies, 38(1), 13-35.

2. Adams, Z., & Glück, T. (2015). Financialization in commodity markets: a passing trend or the new normal?. Journal of Banking & Finance, 60, 93-111; Liebi, L. J. (2020). The effect of ETFs on financial markets: a literature review. Financial Markets and Portfolio Management, 34(2), 165-178; Natoli, F. (2021). Financialization of commodities before and after the great financial crisis. Journal of Economic Surveys, 35(2), 488-511.

3. Pellandini-Simányi, L. (2020). The financialization of everyday life. Chapter 14 in The Routledge Handbook of Critical Finance Studies. Taylor & Francis.

4. Fligstein, N., & Goldstein, A. (2015). The emergence of a finance culture in American households, 1989–2007. Socio-Economic Review, 13(3), 575-601.

5. Van Der Zwan (2014) identifies three different perspectives on the financialization concept: (a) financialization at the level of an economy, national or global, (b) financialization at the level of an organization, and (c) financialization at the household level. The way I am applying this concept is closest to this latter conceptualization, except that I focus on transactions and exchanges between two individuals who may not necessarily belong to a household, Van der Zwan, N. (2014). Making sense of financialization. Socio-economic review, 12(1), 99-129. Furthermore, there are a lot of issues here, far beyond the scope of a single blog piece. For instance, the issue of what types of factors financialization diverts attention away from during the valuation process is equally, if not more important, and relevant to such things as our puzzling tolerance for sharing our personal data, and our seeming neglect of privacy in digital environments.

6. Brüggen, E., & Dholakia, U. M. (2010). Determinants of participation and response effort in web panel surveys. Journal of Interactive Marketing, 24(3), 239-250.

7. https://www.psychologytoday.com/us/blog/the-science-behind-behavior/201507/my-experience-as-an-amazon-mechanical-turk-mturk-worker

8. Hull, S. (2023). Work Disguised as Leisure, Leisure Disguised as Work: The Roots and Consequences of the Bifurcated Economy. Yale Journal of Law & the Humanities, 34(2), 303-363.

9. Bailey, R. W. (1987). Uses and misuses of privatization. Proceedings of the Academy of Political Science, 36(3), 138-152.

10. Frey, B. A. F. (2022). Beta Capitalism: The Financialization and Minimum Viability of Food Delivery Labour, Doctoral dissertation, University of Toronto.

11. Note that cost-based pricing methods have a similar issue if not applied thoughtfully; they have the potential to leave money on the table for the seller and result in a great deal for the buyer. In contrast, value-based pricing approaches, especially those that make the effort to convert non-economic worth gained by the customer into dollars and cents, are better at yielding a more balanced transaction where the exchange is fairer to both parties. In the context of the current discussion, cost-based pricing is a “low financialization” method, and value-based pricing is a “high financialization” method.

12. Potter, J. (1979). Setting a price on a house is a dilemma for sellers. New York Times. Available online at: https://www.nytimes.com/1979/06/10/archives/setting-a-price-on-a-house-is-a-dilemma-for-sellers-setting-the.html

13. Loveland, K. E., Mandel, N., & Dholakia, U. M. (2014). Understanding Homeowners’ Pricing Decisions: An Investigation of the Roles of Ownership Duration and Financial and Emotional Reference Points. Customer Needs and Solutions, 1, 225-240.