The Importance of Utility

Emily Courtois   Honorbound

Blog Post #1: The Importance of Utility

Utility is an economic term defined as the reason anyone gets anything, or pleasure and necessity[i]. However, utility is not happiness as in a normal conversation. Utility is a purely economic term. It helps to project future data so that economists can make an educated decision when it comes to where and when money can be spent whether in the stock market or just recycling money back into the economy for standard economic benefits.

If utility were represented through a graph, an economist can see skewed data when some individuals unexpectedly contradict their own utility—sometimes small unconformities but sometimes large. Why would they? Economists saw an explanation to this: short term utility[ii]. People sometimes heavily weigh their judgment on the present, rather than what good can come from an action now. For example, drugs. Individuals use drugs to get happiness, even though, in the long run, they will need more medical help earlier in their lifetime than the average man or woman who does not smoke.

There are four types of utility: time, place, form, and possession[iii]. Possession utility is the kind of utility which gives economists a real run for the company’s money. “The utility of possession refers to the benefit customers derive from ownership of a company’s product once they have purchased it”[iv]. The utility of possession is what every person wants and that same statistic can also skewer company data when selecting their next strategical move with their finances. It’s imperative that the data not be skewered so the company can gain the maximum profit possible but that’s not always the case. That being said, the utility of possession is quite an enigma for many economists, resulting in an unexpected economic development.

One current example would be represented by the HSBC[v]. It’s a huge global bank who reported what they “accomplished” last year. They were expected to earn $14.4 billion in 2016, however, they only earned $7.1 billion. In the past years they were earning much more as well. Economists believed that by having HSBC buy a company called Safra Republic Holdings back in 1999, the company would be much more profitable. But, it turned out to be from the data of past customer opinions and so Safra Republic Holdings reduced the company’s profit by $3.2 billion.

Because of utility changes throughout the recent years of this company, the results ended as a huge disappointment. The unexpected economic development was caused by economists who couldn’t completely grasp the skewed possession utility data.

Unfortunately, there is no decent way of predicting when possession utility strikes. Guessing is the best tool in this case if the data is inconclusive, but economists—now more aware of possession utility over time—can help change the probability of a company’s downfall.

 

 

 

 

 

 

 

 

 

 

 

 

[i] Maverick, J.B. “What are the four types of economic utility?” Investopedia. March 26, 2015. Accessed March 29, 2017. http://www.investopedia.com/ask/answers/032615/what-are-four-types-economic-utility.asp.

[ii] Murphy, Robert P. “”Utility” in Economics vs. “Happiness” in Normal Conversation.” Mises Canada. May 25, 2015. Accessed March 29, 2017. https://www.mises.ca/utility-in-economics-vs-happiness-in-normal-conversation/.

[iii] Maverick, J.B. “What are the four types of economic utility?” Investopedia. March 26, 2015. Accessed March 29, 2017. http://www.investopedia.com/ask/answers/032615/what-are-four-types-economic-utility.asp.

[iv] Ibid.

[v] CNBC, Reuters With. “HSBC blames ‘largely unexpected economic and political events’ for 62 percent drop in annual pre-tax profit.” CNBC. February 21, 2017. Accessed March 29, 2017. http://www.cnbc.com/2017/02/20/hsbc-reports-results.html.

 

 

Alexander_Chislenko. “Hyper-Economy: Combining price and utility communication in multi-agent systems – Submission to ISAS’98 conference.” Hyper-Economy: Combining price and utility communication in multi-agent systems – Submission to ISAS’98 conference. Accessed March 29, 2017. http://www.lucifer.com/~sasha/HEDG/ISAS98submission.html.

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