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Intrinsic vs. Extrinsic Value

Intrinsic value has traditionally been thought to lie at the heart of ethics. Philosophers use a number of terms to refer to such value. The intrinsic value of something is said to be the value that that thing has “in itself,” or “for its own sake,” or “as such,” or “in its own right.” Extrinsic value is value that is not intrinsic.

Many philosophers take intrinsic value to be crucial to a variety of moral judgments. For example, according to a fundamental form of consequentialism, whether an action is morally right or wrong has exclusively to do with whether its consequences are intrinsically better than those of any other action one can perform under the circumstances. Many other theories also hold that what it is right or wrong to do has at least in part to do with the intrinsic value of the consequences of the actions one can perform. Moreover, if, as is commonly believed, what one is morally responsible for doing is some function of the rightness or wrongness of what one does, then intrinsic value would seem relevant to judgments about responsibility, too. Intrinsic value is also often taken to be pertinent to judgments about moral justice (whether having to do with moral rights or moral desert), insofar as it is good that justice is done and bad that justice is denied, in ways that appear intimately tied to intrinsic value. Finally, it is typically thought that judgments about moral virtue and vice also turn on questions of intrinsic value, inasmuch as virtues are good, and vices bad, again in ways that appear closely connected to such value.

All four types of moral judgments have been the subject of discussion since the dawn of western philosophy in ancient Greece. The Greeks themselves were especially concerned with questions about virtue and vice, and the concept of intrinsic value may be found at work in their writings and in the writings of moral philosophers ever since. Despite this fact, and rather surprisingly, it is only within the last one hundred years or so that this concept has itself been the subject of sustained scrutiny, and even within this relatively brief period the scrutiny has waxed and waned.

1. What Has Intrinsic Value?

2. what is intrinsic value, 3. is there such a thing as intrinsic value at all, 4. what sort of thing can have intrinsic value, 5. how is intrinsic value to be computed, 6. what is extrinsic value, cited works, other works, other internet resources, related entries.

The question “What is intrinsic value?” is more fundamental than the question “What has intrinsic value?,” but historically these have been treated in reverse order. For a long time, philosophers appear to have thought that the notion of intrinsic value is itself sufficiently clear to allow them to go straight to the question of what should be said to have intrinsic value. Not even a potted history of what has been said on this matter can be attempted here, since the record is so rich. Rather, a few representative illustrations must suffice.

In his dialogue Protagoras , Plato [428–347 B.C.E.] maintains (through the character of Socrates, modeled after the real Socrates [470–399 B.C.E.], who was Plato’s teacher) that, when people condemn pleasure, they do so, not because they take pleasure to be bad as such, but because of the bad consequences they find pleasure often to have. For example, at one point Socrates says that the only reason why the pleasures of food and drink and sex seem to be evil is that they result in pain and deprive us of future pleasures (Plato, Protagoras , 353e). He concludes that pleasure is in fact good as such and pain bad, regardless of what their consequences may on occasion be. In the Timaeus , Plato seems quite pessimistic about these consequences, for he has Timaeus declare pleasure to be “the greatest incitement to evil” and pain to be something that “deters from good” (Plato, Timaeus , 69d). Plato does not think of pleasure as the “highest” good, however. In the Republic , Socrates states that there can be no “communion” between “extravagant” pleasure and virtue (Plato, Republic , 402e) and in the Philebus , where Philebus argues that pleasure is the highest good, Socrates argues against this, claiming that pleasure is better when accompanied by intelligence (Plato, Philebus , 60e).

Many philosophers have followed Plato’s lead in declaring pleasure intrinsically good and pain intrinsically bad. Aristotle [384–322 B.C.E.], for example, himself a student of Plato’s, says at one point that all are agreed that pain is bad and to be avoided, either because it is bad “without qualification” or because it is in some way an “impediment” to us; he adds that pleasure, being the “contrary” of that which is to be avoided, is therefore necessarily a good (Aristotle, Nicomachean Ethics , 1153b). Over the course of the more than two thousand years since this was written, this view has been frequently endorsed. Like Plato, Aristotle does not take pleasure and pain to be the only things that are intrinsically good and bad, although some have maintained that this is indeed the case. This more restrictive view, often called hedonism, has had proponents since the time of Epicurus [341–271 B.C.E.]. [ 1 ] Perhaps the most thorough renditions of it are to be found in the works of Jeremy Bentham [1748–1832] and Henry Sidgwick [1838–1900] (see Bentham 1789, Sidgwick 1907); perhaps its most famous proponent is John Stuart Mill [1806–1873] (see Mill 1863).

Most philosophers who have written on the question of what has intrinsic value have not been hedonists; like Plato and Aristotle, they have thought that something besides pleasure and pain has intrinsic value. One of the most comprehensive lists of intrinsic goods that anyone has suggested is that given by William Frankena (Frankena 1973, pp. 87–88): life, consciousness, and activity; health and strength; pleasures and satisfactions of all or certain kinds; happiness, beatitude, contentment, etc.; truth; knowledge and true opinions of various kinds, understanding, wisdom; beauty, harmony, proportion in objects contemplated; aesthetic experience; morally good dispositions or virtues; mutual affection, love, friendship, cooperation; just distribution of goods and evils; harmony and proportion in one’s own life; power and experiences of achievement; self-expression; freedom; peace, security; adventure and novelty; and good reputation, honor, esteem, etc. (Presumably a corresponding list of intrinsic evils could be provided.) Almost any philosopher who has ever addressed the question of what has intrinsic value will find his or her answer represented in some way by one or more items on Frankena’s list. (Frankena himself notes that he does not explicitly include in his list the communion with and love and knowledge of God that certain philosophers believe to be the highest good, since he takes them to fall under the headings of “knowledge” and “love.”) One conspicuous omission from the list, however, is the increasingly popular view that certain environmental entities or qualities have intrinsic value (although Frankena may again assert that these are implicitly represented by one or more items already on the list). Some find intrinsic value, for example, in certain “natural” environments (wildernesses untouched by human hand); some find it in certain animal species; and so on.

Suppose that you were confronted with some proposed list of intrinsic goods. It would be natural to ask how you might assess the accuracy of the list. How can you tell whether something has intrinsic value or not? On one level, this is an epistemological question about which this article will not be concerned. (See the entry in this encyclopedia on moral epistemology.) On another level, however, this is a conceptual question, for we cannot be sure that something has intrinsic value unless we understand what it is for something to have intrinsic value.

The concept of intrinsic value has been characterized above in terms of the value that something has “in itself,” or “for its own sake,” or “as such,” or “in its own right.” The custom has been not to distinguish between the meanings of these terms, but we will see that there is reason to think that there may in fact be more than one concept at issue here. For the moment, though, let us ignore this complication and focus on what it means to say that something is valuable for its own sake as opposed to being valuable for the sake of something else to which it is related in some way. Perhaps it is easiest to grasp this distinction by way of illustration.

Suppose that someone were to ask you whether it is good to help others in time of need. Unless you suspected some sort of trick, you would answer, “Yes, of course.” If this person were to go on to ask you why acting in this way is good, you might say that it is good to help others in time of need simply because it is good that their needs be satisfied. If you were then asked why it is good that people’s needs be satisfied, you might be puzzled. You might be inclined to say, “It just is.” Or you might accept the legitimacy of the question and say that it is good that people’s needs be satisfied because this brings them pleasure. But then, of course, your interlocutor could ask once again, “What’s good about that?” Perhaps at this point you would answer, “It just is good that people be pleased,” and thus put an end to this line of questioning. Or perhaps you would again seek to explain the fact that it is good that people be pleased in terms of something else that you take to be good. At some point, though, you would have to put an end to the questions, not because you would have grown tired of them (though that is a distinct possibility), but because you would be forced to recognize that, if one thing derives its goodness from some other thing, which derives its goodness from yet a third thing, and so on, there must come a point at which you reach something whose goodness is not derivative in this way, something that “just is” good in its own right, something whose goodness is the source of, and thus explains, the goodness to be found in all the other things that precede it on the list. It is at this point that you will have arrived at intrinsic goodness (cf. Aristotle, Nicomachean Ethics , 1094a). That which is intrinsically good is nonderivatively good; it is good for its own sake. That which is not intrinsically good but extrinsically good is derivatively good; it is good, not (insofar as its extrinsic value is concerned) for its own sake, but for the sake of something else that is good and to which it is related in some way. Intrinsic value thus has a certain priority over extrinsic value. The latter is derivative from or reflective of the former and is to be explained in terms of the former. It is for this reason that philosophers have tended to focus on intrinsic value in particular.

The account just given of the distinction between intrinsic and extrinsic value is rough, but it should do as a start. Certain complications must be immediately acknowledged, though. First, there is the possibility, mentioned above, that the terms traditionally used to refer to intrinsic value in fact refer to more than one concept; again, this will be addressed later (in this section and the next). Another complication is that it may not in fact be accurate to say that whatever is intrinsically good is nonderivatively good; some intrinsic value may be derivative. This issue will be taken up (in Section 5) when the computation of intrinsic value is discussed; it may be safely ignored for now. Still another complication is this. It is almost universally acknowledged among philosophers that all value is “supervenient” or “grounded in” on certain nonevaluative features of the thing that has value. Roughly, what this means is that, if something has value, it will have this value in virtue of certain nonevaluative features that it has; its value can be attributed to these features. For example, the value of helping others in time of need might be attributed to the fact that such behavior has the feature of being causally related to certain pleasant experiences induced in those who receive the help. Suppose we accept this and accept also that the experiences in question are intrinsically good. In saying this, we are (barring the complication to be discussed in Section 5) taking the value of the experiences to be nonderivative. Nonetheless, we may well take this value, like all value, to be supervenient on, or grounded in, something. In this case, we would probably simply attribute the value of the experiences to their having the feature of being pleasant. This brings out the subtle but important point that the question whether some value is derivative is distinct from the question whether it is supervenient. Even nonderivative value (value that something has in its own right; value that is, in some way, not attributable to the value of anything else) is usually understood to be supervenient on certain nonevaluative features of the thing that has value (and thus to be attributable, in a different way, to these features ).

To repeat: whatever is intrinsically good is (barring the complication to be discussed in Section 5) nonderivatively good. It would be a mistake, however, to affirm the converse of this and say that whatever is nonderivatively good is intrinsically good. As “intrinsic value” is traditionally understood, it refers to a particular way of being nonderivatively good; there are other ways in which something might be nonderivatively good. For example, suppose that your interlocutor were to ask you whether it is good to eat and drink in moderation and to exercise regularly. Again, you would say, “Yes, of course.” If asked why, you would say that this is because such behavior promotes health. If asked what is good about being healthy, you might cite something else whose goodness would explain the value of health, or you might simply say, “Being healthy just is a good way to be.” If the latter were your response, you would be indicating that you took health to be nonderivatively good in some way. In what way, though? Well, perhaps you would be thinking of health as intrinsically good. But perhaps not. Suppose that what you meant was that being healthy just is “good for” the person who is healthy (in the sense that it is in each person’s interest to be healthy), so that John’s being healthy is good for John, Jane’s being healthy is good for Jane, and so on. You would thereby be attributing a type of nonderivative interest-value to John’s being healthy, and yet it would be perfectly consistent for you to deny that John’s being healthy is intrinsically good. If John were a villain, you might well deny this. Indeed, you might want to insist that, in light of his villainy, his being healthy is intrinsically bad , even though you recognize that his being healthy is good for him . If you did say this, you would be indicating that you subscribe to the common view that intrinsic value is nonderivative value of some peculiarly moral sort. [ 2 ]

Let us now see whether this still rough account of intrinsic value can be made more precise. One of the first writers to concern himself with the question of what exactly is at issue when we ascribe intrinsic value to something was G. E. Moore [1873–1958]. In his book Principia Ethica , Moore asks whether the concept of intrinsic value (or, more particularly, the concept of intrinsic goodness, upon which he tended to focus) is analyzable. In raising this question, he has a particular type of analysis in mind, one which consists in “breaking down” a concept into simpler component concepts. (One example of an analysis of this sort is the analysis of the concept of being a vixen in terms of the concepts of being a fox and being female.) His own answer to the question is that the concept of intrinsic goodness is not amenable to such analysis (Moore 1903, ch. 1). In place of analysis, Moore proposes a certain kind of thought-experiment in order both to come to understand the concept better and to reach a decision about what is intrinsically good. He advises us to consider what things are such that, if they existed by themselves “in absolute isolation,” we would judge their existence to be good; in this way, we will be better able to see what really accounts for the value that there is in our world. For example, if such a thought-experiment led you to conclude that all and only pleasure would be good in isolation, and all and only pain bad, you would be a hedonist. [ 3 ] Moore himself deems it incredible that anyone, thinking clearly, would reach this conclusion. He says that it involves our saying that a world in which only pleasure existed—a world without any knowledge, love, enjoyment of beauty, or moral qualities—is better than a world that contained all these things but in which there existed slightly less pleasure (Moore 1912, p. 102). Such a view he finds absurd.

Regardless of the merits of this isolation test, it remains unclear exactly why Moore finds the concept of intrinsic goodness to be unanalyzable. At one point he attacks the view that it can be analyzed wholly in terms of “natural” concepts—the view, that is, that we can break down the concept of being intrinsically good into the simpler concepts of being A , being B , being C …, where these component concepts are all purely descriptive rather than evaluative. (One candidate that Moore discusses is this: for something to be intrinsically good is for it to be something that we desire to desire.) He argues that any such analysis is to be rejected, since it will always be intelligible to ask whether (and, presumably, to deny that) it is good that something be A , B , C ,…, which would not be the case if the analysis were accurate (Moore 1903, pp. 15–16). Even if this argument is successful (a complicated matter about which there is considerable disagreement), it of course does not establish the more general claim that the concept of intrinsic goodness is not analyzable at all, since it leaves open the possibility that this concept is analyzable in terms of other concepts, some or all of which are not “natural” but evaluative. Moore apparently thinks that his objection works just as well where one or more of the component concepts A , B , C ,…, is evaluative; but, again, many dispute the cogency of his argument. Indeed, several philosophers have proposed analyses of just this sort. For example, Roderick Chisholm [1916–1999] has argued that Moore’s own isolation test in fact provides the basis for an analysis of the concept of intrinsic value. He formulates a view according to which (to put matters roughly) to say that a state of affairs is intrinsically good or bad is to say that it is possible that its goodness or badness constitutes all the goodness or badness that there is in the world (Chisholm 1978).

Eva Bodanszky and Earl Conee have attacked Chisholm’s proposal, showing that it is, in its details, unacceptable (Bodanszky and Conee 1981). However, the general idea that an intrinsically valuable state is one that could somehow account for all the value in the world is suggestive and promising; if it could be adequately formulated, it would reveal an important feature of intrinsic value that would help us better understand the concept. We will return to this point in Section 5. Rather than pursue such a line of thought, Chisholm himself responded (Chisholm 1981) in a different way to Bodanszky and Conee. He shifted from what may be called an ontological version of Moore’s isolation test—the attempt to understand the intrinsic value of a state in terms of the value that there would be if it were the only valuable state in existence —to an intentional version of that test—the attempt to understand the intrinsic value of a state in terms of the kind of attitude it would be fitting to have if one were to contemplate the valuable state as such, without reference to circumstances or consequences.

This new analysis in fact reflects a general idea that has a rich history. Franz Brentano [1838–1917], C. D. Broad [1887–1971], W. D. Ross [1877–1971], and A. C. Ewing [1899–1973], among others, have claimed, in a more or less qualified way, that the concept of intrinsic goodness is analyzable in terms of the fittingness of some “pro” (i.e., positive) attitude (Brentano 1969, p. 18; Broad 1930, p. 283; Ross 1939, pp. 275–76; Ewing 1948, p. 152). Such an analysis, which has come to be called “the fitting attitude analysis” of value, is supported by the mundane observation that, instead of saying that something is good, we often say that it is valuable , which itself just means that it is fitting to value the thing in question. It would thus seem very natural to suppose that for something to be intrinsically good is simply for it to be such that it is fitting to value it for its own sake. (“Fitting” here is often understood to signify a particular kind of moral fittingness, in keeping with the idea that intrinsic value is a particular kind of moral value. The underlying point is that those who value for its own sake that which is intrinsically good thereby evince a kind of moral sensitivity.)

Though undoubtedly attractive, this analysis can be and has been challenged. Brand Blanshard [1892–1987], for example, argues that the analysis is to be rejected because, if we ask why something is such that it is fitting to value it for its own sake, the answer is that this is the case precisely because the thing in question is intrinsically good; this answer indicates that the concept of intrinsic goodness is more fundamental than that of the fittingness of some pro attitude, which is inconsistent with analyzing the former in terms of the latter (Blanshard 1961, pp. 284–86). Ewing and others have resisted Blanshard’s argument, maintaining that what grounds and explains something’s being valuable is not its being good but rather its having whatever non-value property it is upon which its goodness supervenes; they claim that it is because of this underlying property that the thing in question is “both” good and valuable (Ewing 1948, pp. 157 and 172. Cf. Lemos 1994, p. 19). Thomas Scanlon calls such an account of the relation between valuableness, goodness, and underlying properties a buck-passing account, since it “passes the buck” of explaining why something is such that it is fitting to value it from its goodness to some property that underlies its goodness (Scanlon 1998, pp. 95 ff.). Whether such an account is acceptable has recently been the subject of intense debate. Many, like Scanlon, endorse passing the buck; some, like Blanshard, object to doing so. If such an account is acceptable, then Ewing’s analysis survives Blanshard’s challenge; but otherwise not. (Note that one might endorse passing the buck and yet reject Ewing’s analysis for some other reason. Hence a buck-passer may, but need not, accept the analysis. Indeed, there is reason to think that Moore himself is a buck-passer, even though he takes the concept of intrinsic goodness to be unanalyzable; cf. Olson 2006).

Even if Blanshard’s argument succeeds and intrinsic goodness is not to be analyzed in terms of the fittingness of some pro attitude, it could still be that there is a strict correlation between something’s being intrinsically good and its being such that it is fitting to value it for its own sake; that is, it could still be both that (a) it is necessarily true that whatever is intrinsically good is such that it is fitting to value it for its own sake, and that (b) it is necessarily true that whatever it is fitting to value for its own sake is intrinsically good. If this were the case, it would reveal an important feature of intrinsic value, recognition of which would help us to improve our understanding of the concept. However, this thesis has also been challenged.

Krister Bykvist has argued that what he calls solitary goods may constitute a counterexample to part (a) of the thesis (Bykvist 2009, pp. 4 ff.). Such (alleged) goods consist in states of affairs that entail that there is no one in a position to value them. Suppose, for example, that happiness is intrinsically good, and good in such a way that it is fitting to welcome it. Then, more particularly, the state of affairs of there being happy egrets is intrinsically good; so too, presumably, is the more complex state of affairs of there being happy egrets but no welcomers. The simpler state of affairs would appear to pose no problem for part (a) of the thesis, but the more complex state of affairs, which is an example of a solitary good, may pose a problem. For if to welcome a state of affairs entails that that state of affairs obtains, then welcoming the more complex state of affairs is logically impossible. Furthermore, if to welcome a state of affairs entails that one believes that that state of affairs obtains, then the pertinent belief regarding the more complex state of affairs would be necessarily false. In neither case would it seem plausible to say that welcoming the state of affairs is nonetheless fitting. Thus, unless this challenge can somehow be met, a proponent of the thesis must restrict the thesis to pro attitudes that are neither truth- nor belief-entailing, a restriction that might itself prove unwelcome, since it excludes a number of favorable responses to what is good (such as promoting what is good, or taking pleasure in what is good) to which proponents of the thesis have often appealed.

As to part (b) of the thesis: some philosophers have argued that it can be fitting to value something for its own sake even if that thing is not intrinsically good. A relatively early version of this argument was again provided by Blanshard (1961, pp. 287 ff. Cf. Lemos 1994, p. 18). Recently the issue has been brought into stark relief by the following sort of thought-experiment. Imagine that an evil demon wants you to value him for his own sake and threatens to cause you severe suffering unless you do. It seems that you have good reason to do what he wants—it is appropriate or fitting to comply with his demand and value him for his own sake—even though he is clearly not intrinsically good (Rabinowicz and Rønnow-Rasmussen 2004, pp. 402 ff.). This issue, which has come to be known as “the wrong kind of reason problem,” has attracted a great deal of attention. Some have been persuaded that the challenge succeeds, while others have sought to undermine it.

One final cautionary note. It is apparent that some philosophers use the term “intrinsic value” and similar terms to express some concept other than the one just discussed. In particular, Immanuel Kant [1724–1804] is famous for saying that the only thing that is “good without qualification” is a good will, which is good not because of what it effects or accomplishes but “in itself” (Kant 1785, Ak. 1–3). This may seem to suggest that Kant ascribes (positive) intrinsic value only to a good will, declaring the value that anything else may possess merely extrinsic, in the senses of “intrinsic value” and “extrinsic value” discussed above. This suggestion is, if anything, reinforced when Kant immediately adds that a good will “is to be esteemed beyond comparison as far higher than anything it could ever bring about,” that it “shine[s] like a jewel for its own sake,” and that its “usefulness…can neither add to, nor subtract from, [its] value.” For here Kant may seem not only to be invoking the distinction between intrinsic and extrinsic value but also to be in agreement with Brentano et al. regarding the characterization of the former in terms of the fittingness of some attitude, namely, esteem. (The term “respect” is often used in place of “esteem” in such contexts.) Nonetheless, it becomes clear on further inspection that Kant is in fact discussing a concept quite different from that with which this article is concerned. A little later on he says that all rational beings, even those that lack a good will, have “absolute value”; such beings are “ends in themselves” that have a “dignity” or “intrinsic value” that is “above all price” (Kant 1785, Ak. 64 and 77). Such talk indicates that Kant believes that the sort of value that he ascribes to rational beings is one that they possess to an infinite degree. But then, if this were understood as a thesis about intrinsic value as we have been understanding this concept, the implication would seem to be that, since it contains rational beings, ours is the best of all possible worlds. [ 4 ] Yet this is a thesis that Kant, along with many others, explicitly rejects elsewhere (Kant, Lectures in Ethics ). It seems best to understand Kant, and other philosophers who have since written in the same vein (cf. Anderson 1993), as being concerned not with the question of what intrinsic value rational beings have—in the sense of “intrinsic value” discussed above—but with the quite different question of how we ought to behave toward such creatures (cf. Bradley 2006).

In the history of philosophy, relatively few seem to have entertained doubts about the concept of intrinsic value. Much of the debate about intrinsic value has tended to be about what things actually do have such value. However, once questions about the concept itself were raised, doubts about its metaphysical implications, its moral significance, and even its very coherence began to appear.

Consider, first, the metaphysics underlying ascriptions of intrinsic value. It seems safe to say that, before the twentieth century, most moral philosophers presupposed that the intrinsic goodness of something is a genuine property of that thing, one that is no less real than the properties (of being pleasant, of satisfying a need, or whatever) in virtue of which the thing in question is good. (Several dissented from this view, however. Especially well known for their dissent are Thomas Hobbes [1588–1679], who believed the goodness or badness of something to be constituted by the desire or aversion that one may have regarding it, and David Hume [1711–1776], who similarly took all ascriptions of value to involve projections of one’s own sentiments onto whatever is said to have value. See Hobbes 1651, Hume 1739.) It was not until Moore argued that this view implies that intrinsic goodness, as a supervening property, is a very different sort of property (one that he called “nonnatural”) from those (which he called “natural”) upon which it supervenes, that doubts about the view proliferated.

One of the first to raise such doubts and to press for a view quite different from the prevailing view was Axel Hägerström [1868–1939], who developed an account according to which ascriptions of value are neither true nor false (Hägerström 1953). This view has come to be called “noncognitivism.” The particular brand of noncognitivism proposed by Hägerström is usually called “emotivism,” since it holds (in a manner reminiscent of Hume) that ascriptions of value are in essence expressions of emotion. (For example, an emotivist of a particularly simple kind might claim that to say “ A is good” is not to make a statement about A but to say something like “Hooray for A !”) This view was taken up by several philosophers, including most notably A. J. Ayer [1910–1989] and Charles L. Stevenson [1908–1979] (see Ayer 1946, Stevenson 1944). Other philosophers have since embraced other forms of noncognitivism. R. M. Hare [1919–2002], for example, advocated the theory of “prescriptivism” (according to which moral judgments, including judgments about goodness and badness, are not descriptive statements about the world but rather constitute a kind of command as to how we are to act; see Hare 1952) and Simon Blackburn and Allan Gibbard have since proposed yet other versions of noncognitivism (Blackburn 1984, Gibbard 1990).

Hägerström characterized his own view as a type of “value-nihilism,” and many have followed suit in taking noncognitivism of all kinds to constitute a rejection of the very idea of intrinsic value. But this seems to be a mistake. We should distinguish questions about value from questions about evaluation . Questions about value fall into two main groups, conceptual (of the sort discussed in the last section) and substantive (of the sort discussed in the first section). Questions about evaluation have to do with what precisely is going on when we ascribe value to something. Cognitivists claim that our ascriptions of value constitute statements that are either true or false; noncognitivists deny this. But even noncognitivists must recognize that our ascriptions of value fall into two fundamental classes—ascriptions of intrinsic value and ascriptions of extrinsic value—and so they too must concern themselves with the very same conceptual and substantive questions about value as cognitivists address. It may be that noncognitivism dictates or rules out certain answers to these questions that cognitivism does not, but that is of course quite a different matter from rejecting the very idea of intrinsic value on metaphysical grounds.

Another type of metaphysical challenge to intrinsic value stems from the theory of “pragmatism,” especially in the form advanced by John Dewey [1859–1952] (see Dewey 1922). According to the pragmatist, the world is constantly changing in such a way that the solution to one problem becomes the source of another, what is an end in one context is a means in another, and thus it is a mistake to seek or offer a timeless list of intrinsic goods and evils, of ends to be achieved or avoided for their own sakes. This theme has been elaborated by Monroe Beardsley, who attacks the very notion of intrinsic value (Beardsley 1965; cf. Conee 1982). Denying that the existence of something with extrinsic value presupposes the existence of something else with intrinsic value, Beardsley argues that all value is extrinsic. (In the course of his argument, Beardsley rejects the sort of “dialectical demonstration” of intrinsic value that was attempted in the last section, when an explanation of the derivative value of helping others was given in terms of some nonderivative value.) A quick response to Beardsley’s misgivings about intrinsic value would be to admit that it may well be that, the world being as complex as it is, nothing is such that its value is wholly intrinsic; perhaps whatever has intrinsic value also has extrinsic value, and of course many things that have extrinsic value will have no (or, at least, neutral) intrinsic value. Far from repudiating the notion of intrinsic value, though, this admission would confirm its legitimacy. But Beardsley would insist that this quick response misses the point of his attack, and that it really is the case, not just that whatever has value has extrinsic value, but also that nothing has intrinsic value. His argument for this view is based on the claim that the concept of intrinsic value is “inapplicable,” in that, even if something had such value, we could not know this and hence its having such value could play no role in our reasoning about value. But here Beardsley seems to be overreaching. Even if it were the case that we cannot know whether something has intrinsic value, this of course leaves open the question whether anything does have such value. And even if it could somehow be shown that nothing does have such value, this would still leave open the question whether something could have such value. If the answer to this last question is “yes,” then the legitimacy of the concept of intrinsic value is in fact confirmed rather than refuted.

As has been noted, some philosophers do indeed doubt the legitimacy, the very coherence, of the concept of intrinsic value. Before we turn to a discussion of this issue, however, let us for the moment presume that the concept is coherent and address a different sort of doubt: the doubt that the concept has any great moral significance. Recall the suggestion, mentioned in the last section, that discussions of intrinsic value may have been compromised by a failure to distinguish certain concepts. This suggestion is at the heart of Christine Korsgaard’s “Two Distinctions in Goodness” (Korsgaard 1983). Korsgaard notes that “intrinsic value” has traditionally been contrasted with “instrumental value” (the value that something has in virtue of being a means to an end) and claims that this approach is misleading. She contends that “instrumental value” is to be contrasted with “final value,” that is, the value that something has as an end or for its own sake; however, “intrinsic value” (the value that something has in itself, that is, in virtue of its intrinsic, nonrelational properties) is to be contrasted with “extrinsic value” (the value that something has in virtue of its extrinsic, relational properties). (An example of a nonrelational property is the property of being round; an example of a relational property is the property of being loved.) As an illustration of final value, Korsgaard suggests that gorgeously enameled frying pans are, in virtue of the role they play in our lives, good for their own sakes. In like fashion, Beardsley wonders whether a rare stamp may be good for its own sake (Beardsley 1965); Shelly Kagan says that the pen that Abraham Lincoln used to sign the Emancipation Proclamation may well be good for its own sake (Kagan 1998); and others have offered similar examples (cf. Rabinowicz and Rønnow-Rasmussen 1999 and 2003). Notice that in each case the value being attributed to the object in question is (allegedly) had in virtue of some extrinsic property of the object. This puts the moral significance of intrinsic value into question, since (as is apparent from our discussion so far) it is with the notion of something’s being valuable for its own sake that philosophers have traditionally been, and continue to be, primarily concerned.

There is an important corollary to drawing a distinction between intrinsic value and final value (and between extrinsic value and nonfinal value), and that is that, contrary to what Korsgaard herself initially says, it may be a mistake to contrast final value with instrumental value. If it is possible, as Korsgaard claims, that final value sometimes supervenes on extrinsic properties, then it might be possible that it sometimes supervenes in particular on the property of being a means to some other end. Indeed, Korsgaard herself suggests this when she says that “certain kinds of things, such as luxurious instruments, … are valued for their own sakes under the condition of their usefulness” (Korsgaard 1983, p. 185). Kagan also tentatively endorses this idea. If the idea is coherent, then we should in principle distinguish two kinds of instrumental value, one final and the other nonfinal. [ 5 ] If something A is a means to something else B and has instrumental value in virtue of this fact, such value will be nonfinal if it is merely derivative from or reflective of B ’s value, whereas it will be final if it is nonderivative, that is, if it is a value that A has in its own right (due to the fact that it is a means to B ), irrespective of any value that B may or may not have in its own right.

Even if it is agreed that it is final value that is central to the concerns of moral philosophers, we should be careful in drawing the conclusion that intrinsic value is not central to their concerns. First, there is no necessity that the term “intrinsic value” be reserved for the value that something has in virtue of its intrinsic properties; presumably it has been used by many writers simply to refer to what Korsgaard calls final value, in which case the moral significance of (what is thus called) intrinsic value has of course not been thrown into doubt. Nonetheless, it should probably be conceded that “final value” is a more suitable term than “intrinsic value” to refer to the sort of value in question, since the latter term certainly does suggest value that supervenes on intrinsic properties. But here a second point can be made, and that is that, even if use of the term “intrinsic value” is restricted accordingly, it is arguable that, contrary to Korsgaard’s contention, all final value does after all supervene on intrinsic properties alone; if that were the case, there would seem to be no reason not to continue to use the term “intrinsic value” to refer to final value. Whether this is in fact the case depends in part on just what sort of thing can be valuable for its own sake—an issue to be taken up in the next section.

In light of the matter just discussed, we must now decide what terminology to adopt. It is clear that moral philosophers since ancient times have been concerned with the distinction between the value that something has for its own sake (the sort of nonderivative value that Korsgaard calls “final value”) and the value that something has for the sake of something else to which it is related in some way. However, given the weight of tradition, it seems justifiable, perhaps even advisable, to continue, despite Korsgaard’s misgivings, to use the terms “intrinsic value” and “extrinsic value” to refer to these two types of value; if we do so, however, we should explicitly note that this practice is not itself intended to endorse, or reject, the view that intrinsic value supervenes on intrinsic properties alone.

Let us now turn to doubts about the very coherence of the concept of intrinsic value, so understood. In Principia Ethica and elsewhere, Moore embraces the consequentialist view, mentioned above, that whether an action is morally right or wrong turns exclusively on whether its consequences are intrinsically better than those of its alternatives. Some philosophers have recently argued that ascribing intrinsic value to consequences in this way is fundamentally misconceived. Peter Geach, for example, argues that Moore makes a serious mistake when comparing “good” with “yellow.” [ 6 ] Moore says that both terms express unanalyzable concepts but are to be distinguished in that, whereas the latter refers to a natural property, the former refers to a nonnatural one. Geach contends that there is a mistaken assimilation underlying Moore’s remarks, since “good” in fact operates in a way quite unlike that of “yellow”—something that Moore wholly overlooks. This contention would appear to be confirmed by the observation that the phrase “ x is a yellow bird” splits up logically (as Geach puts it) into the phrase “ x is a bird and x is yellow,” whereas the phrase “ x is a good singer” does not split up in the same way. Also, from “ x is a yellow bird” and “a bird is an animal” we do not hesitate to infer “ x is a yellow animal,” whereas no similar inference seems warranted in the case of “ x is a good singer” and “a singer is a person.” On the basis of these observations Geach concludes that nothing can be good in the free-standing way that Moore alleges; rather, whatever is good is good relative to a certain kind.

Judith Thomson has recently elaborated on Geach’s thesis (Thomson 1997). Although she does not unqualifiedly agree that whatever is good is good relative to a certain kind, she does claim that whatever is good is good in some way; nothing can be “just plain good,” as she believes Moore would have it. Philippa Foot, among others, has made a similar charge (Foot 1985). It is a charge that has been rebutted by Michael Zimmerman, who argues that Geach’s tests are less straightforward than they may seem and fail after all to reveal a significant distinction between the ways in which “good” and “yellow” operate (Zimmerman 2001, ch. 2). He argues further that Thomson mischaracterizes Moore’s conception of intrinsic value. According to Moore, he claims, what is intrinsically good is not “just plain good”; rather, it is good in a particular way, in keeping with Thomson’s thesis that all goodness is goodness in a way. He maintains that, for Moore and other proponents of intrinsic value, such value is a particular kind of moral value. Mahrad Almotahari and Adam Hosein have revived Geach’s challenge (Almotahari and Hosein 2015). They argue that if, contrary to Geach, “good” could be used predicatively, we would be able to use the term predicatively in sentences of the form ‘ a is a good K ’ but, they argue, the linguistic evidence indicates that we cannot do so (Almotahari and Hosein 2015, 1493–4).

Among those who do not doubt the coherence of the concept of intrinsic value there is considerable difference of opinion about what sort or sorts of entity can have such value. Moore does not explicitly address this issue, but his writings show him to have a liberal view on the matter. There are times when he talks of individual objects (e.g., books) as having intrinsic value, others when he talks of the consciousness of individual objects (or of their qualities) as having intrinsic value, others when he talks of the existence of individual objects as having intrinsic value, others when he talks of types of individual objects as having intrinsic value, and still others when he talks of states of individual objects as having intrinsic value.

Moore would thus appear to be a “pluralist” concerning the bearers of intrinsic value. Others take a more conservative, “monistic” approach, according to which there is just one kind of bearer of intrinsic value. Consider, for example, Frankena’s long list of intrinsic goods, presented in Section 1 above: life, consciousness, etc. To what kind(s) of entity do such terms refer? Various answers have been given. Some (such as Panayot Butchvarov) claim that it is properties that are the bearers of intrinsic value (Butchvarov 1989, pp. 14–15). On this view, Frankena’s list implies that it is the properties of being alive, being conscious, and so on, that are intrinsically good. Others (such as Chisholm) claim that it is states of affairs that are the bearers of intrinsic value (Chisholm 1968–69, 1972, 1975). On this view, Frankena’s list implies that it is the states of affairs of someone (or something) being alive, someone being conscious, and so on, that are intrinsically good. Still others (such as Ross) claim that it is facts that are the bearers of intrinsic value (Ross 1930, pp. 112–13; cf. Lemos 1994, ch. 2). On this view, Frankena’s list implies that it is the facts that someone (or something) is alive, that someone is conscious, and so on, that are intrinsically good. (The difference between Chisholm’s and Ross’s views would seem to be this: whereas Chisholm would ascribe intrinsic value even to states of affairs, such as that of everyone being happy, that do not obtain, Ross would ascribe such value only to states of affairs that do obtain.)

Ontologists often divide entities into two fundamental classes, those that are abstract and those that are concrete. Unfortunately, there is no consensus on just how this distinction is to be drawn. Most philosophers would classify the sorts of entities just mentioned (properties, states of affairs, and facts) as abstract. So understood, the claim that intrinsic value is borne by such entities is to be distinguished from the claim that it is borne by certain other closely related entities that are often classified as concrete. For example, it has recently been suggested that it is tropes that have intrinsic value. [ 7 ] Tropes are supposed to be a sort of particularized property, a kind of property-instance (rather than simply a property). (Thus the particular whiteness of a particular piece of paper is to be distinguished, on this view, from the property of whiteness.) It has also been suggested that it is states, understood as a kind of instance of states of affairs, that have intrinsic value (cf. Zimmerman 2001, ch. 3).

Those who make monistic proposals of the sort just mentioned are aware that intrinsic value is sometimes ascribed to kinds of entities different from those favored by their proposals. They claim that all such ascriptions can be reduced to, or translated into, ascriptions of intrinsic value of the sort they deem proper. Consider, for example, Korsgaard’s suggestion that a gorgeously enameled frying pan is good for its own sake. Ross would say that this cannot be the case. If there is any intrinsic value to be found here, it will, according to Ross, not reside in the pan itself but in the fact that it plays a certain role in our lives, or perhaps in the fact that something plays this role, or in the fact that something that plays this role exists. (Others would make other translations in the terms that they deem appropriate.) On the basis of this ascription of intrinsic value to some fact, Ross could go on to ascribe a kind of extrinsic value to the pan itself, in virtue of its relation to the fact in question.

Whether reduction of this sort is acceptable has been a matter of considerable debate. Proponents of monism maintain that it introduces some much-needed order into the discussion of intrinsic value, clarifying just what is involved in the ascription of such value and simplifying the computation of such value—on which point, see the next section. (A corollary of some monistic approaches is that the value that something has for its own sake supervenes on the intrinsic properties of that thing, so that there is a perfect convergence of the two sorts of values that Korsgaard calls “final” and “intrinsic”. On this point, see the last section; Zimmerman 2001, ch. 3; Tucker 2016; and Tucker (forthcoming).) Opponents argue that reduction results in distortion and oversimplification; they maintain that, even if there is intrinsic value to be found in such a fact as that a gorgeously enameled frying pan plays a certain role in our lives, there may yet be intrinsic , and not merely extrinsic, value to be found in the pan itself and perhaps also in its existence (cf. Rabinowicz and Rønnow-Rasmussen 1999 and 2003). Some propose a compromise according to which the kind of intrinsic value that can sensibly be ascribed to individual objects like frying pans is not the same kind of intrinsic value that is the topic of this article and can sensibly be ascribed to items of the sort on Frankena’s list (cf. Bradley 2006). (See again the cautionary note in the final paragraph of Section 2 above.)

In our assessments of intrinsic value, we are often and understandably concerned not only with whether something is good or bad but with how good or bad it is. Arriving at an answer to the latter question is not straightforward. At least three problems threaten to undermine the computation of intrinsic value.

First, there is the possibility that the relation of intrinsic betterness is not transitive (that is, the possibility that something A is intrinsically better than something else B , which is itself intrinsically better than some third thing C , and yet A is not intrinsically better than C ). Despite the very natural assumption that this relation is transitive, it has been argued that it is not (Rachels 1998; Temkin 1987, 1997, 2012). Should this in fact be the case, it would seriously complicate comparisons, and hence assessments, of intrinsic value.

Second, there is the possibility that certain values are incommensurate. For example, Ross at one point contends that it is impossible to compare the goodness of pleasure with that of virtue. Whereas he had suggested in The Right and the Good that pleasure and virtue could be measured on the same scale of goodness, in Foundations of Ethics he declares this to be impossible, since (he claims) it would imply that pleasure of a certain intensity, enjoyed by a sufficient number of people or for a sufficient time, would counterbalance virtue possessed or manifested only by a small number of people or only for a short time; and this he professes to be incredible (Ross 1939, p. 275). But there is some confusion here. In claiming that virtue and pleasure are incommensurate for the reason given, Ross presumably means that they cannot be measured on the same ratio scale. (A ratio scale is one with an arbitrary unit but a fixed zero point. Mass and length are standardly measured on ratio scales.) But incommensurability on a ratio scale does not imply incommensurability on every scale—an ordinal scale, for instance. (An ordinal scale is simply one that supplies an ordering for the quantity in question, such as the measurement of arm-strength that is provided by an arm-wrestling competition.) Ross’s remarks indicate that he in fact believes that virtue and pleasure are commensurate on an ordinal scale, since he appears to subscribe to the arch-puritanical view that any amount of virtue is intrinsically better than any amount of pleasure. This view is just one example of the thesis that some goods are “higher” than others, in the sense that any amount of the former is better than any amount of the latter. This thesis can be traced to the ancient Greeks (Plato, Philebus , 21a-e; Aristotle, Nicomachean Ethics , 1174a), and it has been endorsed by many philosophers since, perhaps most famously by Mill (Mill 1863, paras. 4 ff). Interest in the thesis has recently been revived by a set of intricate and intriguing puzzles, posed by Derek Parfit, concerning the relative values of low-quantity/high-quality goods and high-quantity/low-quality goods (Parfit 1984, Part IV). One response to these puzzles (eschewed by Parfit himself) is to adopt the thesis of the nontransitivity of intrinsic betterness. Another is to insist on the thesis that some goods are higher than others. Such a response does not by itself solve the puzzles that Parfit raises, but, to the extent that it helps, it does so at the cost of once again complicating the computation of intrinsic value.

To repeat: contrary to what Ross says, the thesis that some goods are higher than others implies that such goods are commensurate, and not that they are incommensurate. Some people do hold, however, that certain values really are incommensurate and thus cannot be compared on any meaningful scale. (Isaiah Berlin [1909–1997], for example, is often thought to have said this about the values of liberty and equality. Whether he is best interpreted in this way is debatable. See Berlin 1969.) This view constitutes a more radical threat to the computation of intrinsic value than does the view that intrinsic betterness is not transitive. The latter view presupposes at least some measure of commensurability. If A is better than B and B is better than C , then A is commensurate with B and B is commensurate with C ; and even if it should turn out that A is not better than C , it may still be that A is commensurate with C , either because it is as good as C or because it is worse than C . But if A is incommensurate with B , then A is neither better than nor as good as nor worse than B . (Some claim, however, that the reverse does not hold and that, even if A is neither better than nor as good as nor worse than B , still A may be “on a par” with B and thus be roughly comparable with it. Cf. Chang 1997, 2002.) If such a case can arise, there is an obvious limit to the extent to which we can meaningfully say how good a certain complex whole is (here, “whole” is used to refer to whatever kind of entity may have intrinsic value); for, if such a whole comprises incommensurate goods A and B , then there will be no way of establishing just how good it is overall, even if there is a way of establishing how good it is with respect to each of A and B .

There is a third, still more radical threat to the computation of intrinsic value. Quite apart from any concern with the commensurability of values, Moore famously claims that there is no easy formula for the determination of the intrinsic value of complex wholes because of the truth of what he calls the “principle of organic unities” (Moore 1903, p. 96). According to this principle, the intrinsic value of a whole must not be assumed to be the same as the sum of the intrinsic values of its parts (Moore 1903, p. 28) As an example of an organic unity, Moore gives the case of the consciousness of a beautiful object; he says that this has great intrinsic value, even though the consciousness as such and the beautiful object as such each have comparatively little, if any, intrinsic value. If the principle of organic unities is true, then there is scant hope of a systematic approach to the computation of intrinsic value. Although the principle explicitly rules out only summation as a method of computation, Moore’s remarks strongly suggest that there is no relation between the parts of a whole and the whole itself that holds in general and in terms of which the value of the latter can be computed by aggregating (whether by summation or by some other means) the values of the former. Moore’s position has been endorsed by many other philosophers. For example, Ross says that it is better that one person be good and happy and another bad and unhappy than that the former be good and unhappy and the latter bad and happy, and he takes this to be confirmation of Moore’s principle (Ross 1930, p. 72). Broad takes organic unities of the sort that Moore discusses to be just one instance of a more general phenomenon that he believes to be at work in many other situations, as when, for example, two tunes, each pleasing in its own right, make for a cacophonous combination (Broad 1985, p. 256). Others have furnished still further examples of organic unities (Chisholm 1986, ch. 7; Lemos 1994, chs. 3 and 4, and 1998; Hurka 1998).

Was Moore the first to call attention to the phenomenon of organic unities in the context of intrinsic value? This is debatable. Despite the fact that he explicitly invoked what he called a “principle of summation” that would appear to be inconsistent with the principle of organic unities, Brentano appears nonetheless to have anticipated Moore’s principle in his discussion of Schadenfreude , that is, of malicious pleasure; he condemns such an attitude, even though he claims that pleasure as such is intrinsically good (Brentano 1969, p. 23 n). Certainly Chisholm takes Brentano to be an advocate of organic unities (Chisholm 1986, ch. 5), ascribing to him the view that there are many kinds of organic unity and building on what he takes to be Brentano’s insights (and, going further back in the history of philosophy, the insights of St. Thomas Aquinas [1225–1274] and others).

Recently, a special spin has been put on the principle of organic unities by so-called “particularists.” Jonathan Dancy, for example, has claimed (in keeping with Korsgaard and others mentioned in Section 3 above), that something’s intrinsic value need not supervene on its intrinsic properties alone; in fact, the supervenience-base may be so open-ended that it resists generalization. The upshot, according to Dancy, is that the intrinsic value of something may vary from context to context; indeed, the variation may be so great that the thing’s value changes “polarity” from good to bad, or vice versa (Dancy 2000). This approach to value constitutes an endorsement of the principle of organic unities that is even more subversive of the computation of intrinsic value than Moore’s; for Moore holds that the intrinsic value of something is and must be constant, even if its contribution to the value of wholes of which it forms a part is not, whereas Dancy holds that variation can occur at both levels.

Not everyone has accepted the principle of organic unities; some have held out hope for a more systematic approach to the computation of intrinsic value. However, even someone who is inclined to measure intrinsic value in terms of summation must acknowledge that there is a sense in which the principle of organic unities is obviously true. Consider some complex whole, W , that is composed of three goods, X , Y , and Z , which are wholly independent of one another. Suppose that we had a ratio scale on which to measure these goods, and that their values on this scale were 10, 20, and 30, respectively. We would expect someone who takes intrinsic value to be summative to declare the value of W to be (10 + 20 + 30 =) 60. But notice that, if X , Y , and Z are parts of W , then so too, presumably, are the combinations X -and- Y , X -and- Z , and Y -and- Z ; the values of these combinations, computed in terms of summation, will be 30, 40, and 50, respectively. If the values of these parts of W were also taken into consideration when evaluating W , the value of W would balloon to 180. Clearly, this would be a distortion. Someone who wishes to maintain that intrinsic value is summative must thus show not only how the various alleged examples of organic unities provided by Moore and others are to be reinterpreted, but also how, in the sort of case just sketched, it is only the values of X , Y , and Z , and not the values either of any combinations of these components or of any parts of these components, that are to be taken into account when evaluating W itself. In order to bring some semblance of manageability to the computation of intrinsic value, this is precisely what some writers, by appealing to the idea of “basic” intrinsic value, have tried to do. The general idea is this. In the sort of example just given, each of X , Y , and Z is to be construed as having basic intrinsic value; if any combinations or parts of X , Y , and Z have intrinsic value, this value is not basic; and the value of W is to be computed by appealing only to those parts of W that have basic intrinsic value.

Gilbert Harman was one of the first explicitly to discuss basic intrinsic value when he pointed out the apparent need to invoke such value if we are to avoid distortions in our evaluations (Harman 1967). However, he offers no precise account of the concept of basic intrinsic value and ends his paper by saying that he can think of no way to show that nonbasic intrinsic value is to be computed in terms of the summation of basic intrinsic value. Several philosophers have since tried to do better. Many have argued that nonbasic intrinsic value cannot always be computed by summing basic intrinsic value. Suppose that states of affairs can bear intrinsic value. Let X be the state of affairs of John being pleased to a certain degree x , and Y be the state of affairs of Jane being displeased to a certain degree y , and suppose that X has a basic intrinsic value of 10 and Y a basic intrinsic value of −20. It seems reasonable to sum these values and attribute an intrinsic value of −10 to the conjunctive state of affairs X&Y . But what of the disjunctive state of affairs XvY or the negative state of affairs ~X ? How are their intrinsic values to be computed? Summation seems to be a nonstarter in these cases. Nonetheless, attempts have been made even in such cases to show how the intrinsic value of a complex whole is to be computed in a nonsummative way in terms of the basic intrinsic values of simpler states, thus preserving the idea that basic intrinsic value is the key to the computation of all intrinsic value (Quinn 1974, Chisholm 1975, Oldfield 1977, Carlson 1997). (These attempts have generally been based on the assumption that states of affairs are the sole bearers of intrinsic value. Matters would be considerably more complicated if it turned out that entities of several different ontological categories could all have intrinsic value.)

Suggestions as to how to compute nonbasic intrinsic value in terms of basic intrinsic value of course presuppose that there is such a thing as basic intrinsic value, but few have attempted to provide an account of what basic intrinsic value itself consists in. Fred Feldman is one of the few (Feldman 2000; cf. Feldman 1997, pp. 116–18). Subscribing to the view that only states of affairs bear intrinsic value, Feldman identifies several features that any state of affairs that has basic intrinsic value in particular must possess. He maintains, for example, that whatever has basic intrinsic value must have it to a determinate degree and that this value cannot be “defeated” by any Moorean organic unity. In this way, Feldman seeks to preserve the idea that intrinsic value is summative after all. He does not claim that all intrinsic value is to be computed by summing basic intrinsic value, but he does insist that the value of entire worlds is to be computed in this way.

Despite the detail in which Feldman characterizes the concept of basic intrinsic value, he offers no strict analysis of it. Others have tried to supply such an analysis. For example, by noting that, even if it is true that only states have intrinsic value, it may yet be that not all states have intrinsic value, Zimmerman suggests (to put matters somewhat roughly) that basic intrinsic value is the intrinsic value had by states none of whose proper parts have intrinsic value (Zimmerman 2001, ch. 5). On this basis he argues that disjunctive and negative states in fact have no intrinsic value at all, and thereby seeks to show how all intrinsic value is to be computed in terms of summation after all.

Two final points. First, we are now in a position to see why it was said above (in Section 2) that perhaps not all intrinsic value is nonderivative. If it is correct to distinguish between basic and nonbasic intrinsic value and also to compute the latter in terms of the former, then there is clearly a respectable sense in which nonbasic intrinsic value is derivative. Second, if states with basic intrinsic value account for all the value that there is in the world, support is found for Chisholm’s view (reported in Section 2) that some ontological version of Moore’s isolation test is acceptable.

At the beginning of this article, extrinsic value was said simply—too simply—to be value that is not intrinsic. Later, once intrinsic value had been characterized as nonderivative value of a certain, perhaps moral kind, extrinsic value was said more particularly to be derivative value of that same kind . That which is extrinsically good is good, not (insofar as its extrinsic value is concerned) for its own sake, but for the sake of something else to which it is related in some way. For example, the goodness of helping others in time of need is plausibly thought to be extrinsic (at least in part), being derivative (at least in part) from the goodness of something else, such as these people’s needs being satisfied, or their experiencing pleasure, to which helping them is related in some causal way.

Two questions arise. The first is whether so-called extrinsic value is really a type of value at all. There would seem to be a sense in which it is not, for it does not add to or detract from the value in the world. Consider some long chain of derivation. Suppose that the extrinsic value of A can be traced to the intrinsic value of Z by way of B , C , D … Thus A is good (for example) because of B , which is good because of C , and so on, until we get to Y ’s being good because of Z ; when it comes to Z , however, we have something that is good, not because of something else, but “because of itself,” i.e., for its own sake. In this sort of case, the values of A , B , …, Y are all parasitic on the value of Z . It is Z ’s value that contributes to the value there is in the world; A , B , …, Y contribute no value of their own. (As long as the value of Z is the only intrinsic value at stake, no change of value would be effected in or imparted to the world if a shorter route from A to Z were discovered, one that bypassed some letters in the middle of the alphabet.)

Why talk of “extrinsic value” at all, then? The answer can only be that we just do say that certain things are good, and others bad, not for their own sake but for the sake of something else to which they are related in some way. To say that these things are good and bad only in a derivative sense, that their value is merely parasitic on or reflective of the value of something else, is one thing; to deny that they are good or bad in any respectable sense is quite another. The former claim is accurate; hence the latter would appear unwarranted.

If we accept that talk of “extrinsic value” can be appropriate, however, a second question then arises: what sort of relation must obtain between A and Z if A is to be said to be good “because of” Z ? It is not clear just what the answer to this question is. Philosophers have tended to focus on just one particular causal relation, the means-end relation. This is the relation at issue in the example given earlier: helping others is a means to their needs being satisfied, which is itself a means to their experiencing pleasure. The term most often used to refer to this type of extrinsic value is “instrumental value,” although there is some dispute as to just how this term is to be employed. (Remember also, from Section 3 above, that on some views “instrumental value” may refer to a type of intrinsic , or final, value.) Suppose that A is a means to Z , and that Z is intrinsically good. Should we therefore say that A is instrumentally good? What if A has another consequence, Y , and this consequence is intrinsically bad? What, especially, if the intrinsic badness of Y is greater than the intrinsic goodness of Z ? Some would say that in such a case A is both instrumentally good (because of Z ) and instrumentally bad (because of Y ). Others would say that it is correct to say that A is instrumentally good only if all of A ’s causal consequences that have intrinsic value are, taken as a whole, intrinsically good. Still others would say that whether something is instrumentally good depends not only on what it causes to happen but also on what it prevents from happening (cf. Bradley 1998). For example, if pain is intrinsically bad, and taking an aspirin puts a stop to your pain but causes nothing of any positive intrinsic value, some would say that taking the aspirin is instrumentally good despite its having no intrinsically good consequences.

Many philosophers write as if instrumental value is the only type of extrinsic value, but that is a mistake. Suppose, for instance, that the results of a certain medical test indicate that the patient is in good health, and suppose that this patient’s having good health is intrinsically good. Then we may well want to say that the results are themselves (extrinsically) good. But notice that the results are of course not a means to good health; they are simply indicative of it. Or suppose that making your home available to a struggling artist while you spend a year abroad provides him with an opportunity he would otherwise not have to create some masterpieces, and suppose that either the process or the product of this creation would be intrinsically good. Then we may well want to say that your making your home available to him is (extrinsically) good because of the opportunity it provides him, even if he goes on to squander the opportunity and nothing good comes of it. Or suppose that someone’s appreciating the beauty of the Mona Lisa would be intrinsically good. Then we may well want to say that the painting itself has value in light of this fact, a kind of value that some have called “inherent value” (Lewis 1946, p. 391; cf. Frankena 1973, p. 82). (“ Inherent value” may not be the most suitable term to use here, since it may well suggest intrinsic value, whereas the sort of value at issue is supposed to be a type of extrinsic value. The value attributed to the painting is one that it is said to have in virtue of its relation to something else that would supposedly be intrinsically good if it occurred, namely, the appreciation of its beauty.) Many other instances could be given of cases in which we are inclined to call something good in virtue of its relation to something else that is or would be intrinsically good, even though the relation in question is not a means-end relation.

One final point. It is sometimes said that there can be no extrinsic value without intrinsic value. This thesis admits of several interpretations. First, it might mean that nothing can occur that is extrinsically good unless something else occurs that is intrinsically good, and that nothing can occur that is extrinsically bad unless something else occurs that is intrinsically bad. Second, it might mean that nothing can occur that is either extrinsically good or extrinsically bad unless something else occurs that is either intrinsically good or intrinsically bad. On both these interpretations, the thesis is dubious. Suppose that no one ever appreciates the beauty of Leonardo’s masterpiece, and that nothing else that is intrinsically either good or bad ever occurs; still his painting may be said to be inherently good. Or suppose that the aspirin prevents your pain from even starting, and hence inhibits the occurrence of something intrinsically bad, but nothing else that is intrinsically either good or bad ever occurs; still your taking the aspirin may be said to be instrumentally good. On a third interpretation, however, the thesis might be true. That interpretation is this: nothing can occur that is either extrinsically good or extrinsically neutral or extrinsically bad unless something else occurs that is either intrinsically good or intrinsically neutral or intrinsically bad. This would be trivially true if, as some maintain, the nonoccurrence of something intrinsically either good or bad entails the occurrence of something intrinsically neutral. But even if the thesis should turn out to be false on this third interpretation, too, it would nonetheless seem to be true on a fourth interpretation, according to which the concept of extrinsic value, in all its varieties, is to be understood in terms of the concept of intrinsic value.

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abstract objects | character, moral | cognitivism vs. non-cognitivism, moral | consequentialism | desert | ethics: virtue | fitting attitude theories of value | hedonism | intrinsic vs. extrinsic properties | justice: distributive | Moore, George Edward: moral philosophy | moral epistemology | moral non-naturalism | moral particularism | moral realism | moral responsibility | value: incommensurable | value: pluralism | value theory

Acknowledgments

Many thanks to Fred Feldman, Noah Lemos, Terry McConnell, and Toni Rønnow-Rasmussen for helpful comments on a previous draft.

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What Is Basic Intrinsic Value?

• Published: 16 February 2021
• Volume 24 , pages 33–43, ( 2021 )

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• Noah Lemos 1  

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The concept of basic intrinsic value is important for axiology. Michael Zimmerman and Timothy Perrine each present necessary and sufficient conditions for something’s having basic intrinsic value. I argue that neither account is satisfactory. I present two objections to Zimmerman’s view. First, I argue that his view cannot accommodate some widely held and plausible views about the intrinsic value of knowledge and true belief. Second, I argue that it cannot accommodate some plausible views about the intrinsic value of states when one state occurs in virtue of the other. It cannot handle “clusters” of intrinsically valuable states. In the final section, I explain Perrine’s view and argue that his account also cannot accommodate some plausible views about the value of knowledge and true belief.

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On the Distinctive Value of Knowledge

What We Really Think About Knowledge: It’s a Mental State

Evidentialism doesn’t make an exception for belief.

He presents essentially the same account in Zimmerman  2015 : 11.

W. D. Ross for example, writes, “It seems clear that knowledge, and in a less degree what we may for the present call ‘right opinion’, are states of mind good in themselves. Here too we may, if we please, help ourselves to realize the fact by supposing two state of the universe equal in respect of virtue and of pleasure and of the allocation of pleasure to the virtuous, but such that persons in the one had a far greater understanding of the nature and laws of the universe than those in the other. Can anyone doubt that the first would be a better state of the universe?”. (Ross 1988  138–39). Cf. Brentano 1973  168–170.

I believe that Zimmerman agrees with this point. Zimmerman holds that his analysis is completely general, that it is compatible with a variety of plausible axiologies. He thinks this is a desirable feature of his analysis. (Zimmerman 2001  162–3) I agree with Zimmerman that we want an account of basic intrinsic value that is compatible with a variety of substantive axiologies. I argue that his account is not, and so it should be rejected. Why do we want our account to be completely general? I suggest it is because the distinction between those things that have intrinsic value in a basic way and those that have it in a non-basic or derivative way is one that cuts across substantive axiological theories.

Ross writes, “From one point of view it seems doubtful whether knowledge and right opinion, no matter what it is of or about, should be considered good. Knowledge of mere matters of fact (say of the number of stories in a building), without knowledge of their relations to other facts, might seem worthless; it certainly seems to be worth much less than knowledge of general principles, or facts depending on general principles−what we might call insight or understanding as opposed to mere knowledge. But on reflection it seems clear that even about matters of fact right opinion is in itself a better state of mind to be in than wrong, and knowledge than right opinion.” (Ross 1988  139) Brentano makes a similar point, attributing more intrinsic value to some types of knowledge over others, and intrinsic goodness to true belief. (Brentano 1973  168–69).

See Brentano 1973  170–72; Cf. Chisholm 1986  59–60.

Brentano writes, “Nevertheless, aside from such consequences and incidental circumstances, having ideas is good and is recognizable as such. Certainly, anyone who had to choose between a condition of unconsciousness and the possession of at least some ideas would welcome even the most trivial of these and would not envy inanimate objects. Thus every idea appears to constitute a valuable enrichment of our lives.” (Brentano 1973  173) Cf. Chisholm 1986  63–64.

Perrine recognizes the distinction between intrinsic value and final value, but in his paper he notes that he will use the terms “intrinsic value” and “final value” interchangeably (Perrine 2018  979). He says, “Nothing in what follows will turn on this terminological issue or whether final value always supervenes on a thing’s intrinsic properties”(Perrine 2018  980). Perrine prefers to use the term, “final value”. I prefer to use the term, “intrinsic value”. Nothing in what follows turns on the difference.

Carla courageously defends an innocent person is a part of (5): At t, John has true belief that Carla courageously defends an innocent person since the latter implies the former and whoever conceives the latter conceives the former.

If what I’ve said about certain cases of true belief above, e.g. (5), is true, then some cases of true belief will also supply us with examples of organic unities. We may assume that (5) is intrinsically good or perhaps neutral, but it is not as good as its proper part, namely, Carla courageously defends an innocent person.

Brentano F (1973) The Foundation and Construction of Ethics , edited and translated by Elizabeth Hughes Schneewind. Routledge & Kegan Paul, London

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Lemos, N. What Is Basic Intrinsic Value?. Ethic Theory Moral Prac 24 , 33–43 (2021). https://doi.org/10.1007/s10677-021-10167-7

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DOI : https://doi.org/10.1007/s10677-021-10167-7

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A Pragmatic Theory of Intrinsic Value

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What is Intrinsic Value? Definition & Examples

This guide will examine intrinsic value as a metric for analyzing the worth of a particular asset. It will introduce its various calculation methods, explain why it matters to investors, its pros and cons, as well as dissect the intrinsic value of today’s most popular digital assets.  

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Intrinsic value definition

These evaluations are done through fundamental and technical analysis and include several methods to account for qualitative, quantitative, and perceptual factors. 

The disparity between market price and an analyst’s calculated intrinsic value can be a useful measure of investing opportunity. Knowing an investment’s intrinsic value is especially helpful to value investors with the goal of purchasing stocks or other assets at a discount. 

Intrinsic value is also utilized in options pricing. The intrinsic value, then, referring the difference between the current market price of an underlying asset and the exercise price of an option.

Related reads: What is Value Investing? What is Momentum Investing? 17 Common Investing Mistakes to Avoid How to Buy and Sell Stocks? 10 Best Stock Trading Books for Beginners 15 Top-Rated Investment Books of All Time

Why does intrinsic value matter?

Intrinsic value is an essential metric for investors to recognize when stocks are undervalued or trading below their true worth, which usually signifies a profitable investment opportunity. 

Conversely, if the stock price is higher than the intrinsic value, it may be overvalued and not worth buying (but potentially worth shorting ​). Understanding the notion of intrinsic value and the various strategies you can use to estimate it can help you make well-informed investment decisions. 

Estimating intrinsic value can be particularly crucial when dealing with IPOs (initial public offerings) or young, high-growth companies, specifically those companies known as “industry disruptors,” which have the potential but are not yet recognized by Wall Street analysts.

Most investors believe that the price of a stock will ultimately move towards its intrinsic value over time. However, the stock price is unlikely to stay at its intrinsic value for long. Instead, the stock price will generally oscillate around the intrinsic value. Therefore, traders who use this concept typically prefer to invest when the stock is trading below its intrinsic value and subsequently sell when it is above.

How to calculate intrinsic value?

There is no universal measure for estimating the intrinsic value of a business. However, financial analysts build valuation models based on aspects of a company that includes qualitative, quantitative, and perceptual factors.

Qualitative factors are items characteristic of what the company does, such as business model, governance, and target markets. Quantitative factors found in the fundamental analysis contain financial ratios and financial statement analysis, referring to the measures of how well the company performs. Finally, perceptual factors seek to capture investors’ perceptions of the relative worth of an asset. These factors are primarily accounted for by utilizing technical analysis.

To calculate the intrinsic value of a stock, a financial analyst will:

• Use various methods to get the most accurate result of a company’s value;
• Establish whether the asset is overvalued or undervalued by comparing the value derived from the analysis to the asset’s current market price. Still, any such estimation will be at least partly subjective;

For example, a company might have stable profits, but the stock price would likely decline in the event of a scandal. However, by analyzing the company’s financials, the findings might show that the company is undervalued.

Importantly, investors should assume that the result is still only an estimate. Next, we will look at some of the most widespread approaches for calculating a company’s intrinsic value. 

Discounted cash flow (DCF) model

The discounted cash flow analysis is the most common valuation method to find a stock’s fundamental value. DCF is a valuation method used to forecast the value of an investment based on its projected cash flows . DCF analysis attempts to assess the value of an asset today based on expected revenue streams in the future. 

The weighted average cost of capital (WACC) is usually used as the discount rate for future cash flows because it considers the rate of return expected by shareholders.

The formula is as follows:

To perform a DCF analysis, you’ll need to follow three steps:

• Estimate the projected revenue streams from the investment; 
• Find the present value of projected future cash flows using a discount rate ;
• Discount the expected future cash flows back to the present day using a financial calculator, a spreadsheet, or a manual calculation.

How Warren Buffet uses DCF?

The world’s most well-known value investor Warren Buffett believes investors should pay less for an asset than its intrinsic worth, recommending the DCF valuation method to approximate whether a stock is attractively valued or not at its current price.

Buffet follows the “Margin of Safety” investment principle borrowed from Benjamin Graham and only considers companies trading at a considerable discount (40% or more) to their DCF value. This margin of safety helps ensure reasonable return potential even if some of our assumptions are off.

Recommended video : How Warren Buffet Values Stocks

Residual income model

The residual income (income that one continues to receive after completing the income-producing work) model is another valuation method for estimating a company’s intrinsic value.

It derives the value of the stock based on the difference in earnings per share and per-share book value (in this case, the security’s residual income) to arrive at the stock’s intrinsic value.

The model seeks to find the stock’s intrinsic value by adding its present per-share book value (value of an asset according to the balance sheet) with its discounted residual income.

Dividend discount model

When determining a stock’s intrinsic value, cash is king (slang for the belief that money is more valuable than any other form of an asset). Therefore, models used to calculate intrinsic value often factor in variables primarily relating to cash (e.g., dividends and future cash revenues) and employ the time value of money (TVM). For example, a solid model for finding a company’s intrinsic value is the dividend discount model (DDM). 

One variety of DDM is the Gordon Growth Model (GGM) , which assumes the company is within a steady-state, i.e., growing dividends in perpetuity. 

DDM accounts for the dividends that a company pays out to shareholders, which consequently reflects on the company’s ability to generate cash flows. 

This model has multiple variations, each of which factors in different variables depending on what assumptions you wish to include. The GGM has the most merit when applied to the analysis of blue-chip stocks and broad indices.

Asset-based valuation

The most straightforward way of calculating the intrinsic value of a stock is to use an asset-based valuation. It is calculated by subtracting the sum of a company’s liabilities from the sum of its assets (both tangible and intangible).

A disadvantage to using this method is that it does not incorporate any future growth prospects for a company and might often give much lower intrinsic value estimations. 

Analysis based on a financial metric

Another uncomplicated way of establishing the intrinsic value of a stock is to use a financial metric such as the price-to-earnings (P/E) ratio . A P/E ratio measures a company’s stock price in relation to its earnings. It can also help tell you whether the price is high or low, compared to other companies in the same sector. 

Here’s the formula for this method using the P/E ratio of a stock is as follows:

Intrinsic value = Earnings per share (EPS) x (1 + r) x P/E ratio

r = the expected earnings growth rate

Intrinsic value of an option

Intrinsic value is also employed in options pricing . An options contract gives the buyer the right to buy or sell the underlying security. The profitability of each option will depend on the option’s strike price and the underlying stock’s market price at the options’ expiration date . Namely, a call option grants the buyer the right to buy stock , whereas a put option grants the buyer the right to sell stock short.

If the market price at expiration is above the strike price, the call option is in the money . If the market price is below the put option’s strike, the put is profitable. If an option is not profitable at expiry, it expires, and the buyer loses the upfront fee or premium paid at the onset.

The intrinsic value of a call option is the current price of the stock minus the option’s strike price. The intrinsic value of a put option is the strike price minus the underlying stock’s current price. When the calculated value is negative, the intrinsic value is zero. Therefore, intrinsic value only evaluates the profit as defined by the difference between the option’s strike price and market price.

Example: Intrinsic value of a call option

Extrinsic vs. intrinsic value of options.

The intrinsic value of an option is the actual value that an option would have if it were exercised at the current moment. It represents the difference between the current price of the underlying asset and the strike price of the option.

On the other hand, the extrinsic value of an option, also known as time value, is the additional amount that traders are willing to pay over the intrinsic value. This value is influenced by factors like time until expiration, volatility of the underlying asset, and interest rates. As the expiration date approaches, the extrinsic value typically decreases, a phenomenon known as time decay.

The intrinsic value of commodities and digital assets

Amid the global financial crisis, growing skepticism of banks, and technological innovation, investors are finding new assets to buy and hold, like digital currencies like NFTs and Bitcoin. But, do these assets have intrinsic value? And what about more reputable commodities , such as gold?

Gold intrinsic value

Some people, including legendary value investor Warren Buffett, argue that gold has no intrinsic value, especially as an investment over the long term compared to other more productive assets. However, let’s take intrinsic value to mean the value of gold as a raw material rather than as an investment. 

Firstly, gold does have intrinsic utility – it is required for specific scientific, medical, and manufacturing operations that are unique to it, so it has a real tangible value that no other element can replace, in addition to its ornamental usage (jewelry). However, that utility doesn’t justify the value people put on it or its market value. 

Instead, gold’s value is ultimately a social construction. Most of the utility of gold comes from the fact that people think it is valuable and will keep that value. Still, gold’s relative scarcity, the difficulty of extraction, and its luminous and metallic qualities have only added to the belief of gold as a valuable commodity. 

Moreover, gold can be an asset with various intrinsic qualities that make it unique and necessary for investors to hold in their portfolios. As a global store of value , owning gold can hedge against inflation, be a good portfolio diversifier, and provide financial cover during geopolitical and macroeconomic uncertainty. 

Finally, it is the metal we turn to when other forms of currency fail, which means it always will have some value as insurance against challenging times. 

Bitcoin intrinsic value

Bitcoin ( BTC ) is a digital currency that serves as an alternative to central bank-controlled fiat currency (government-issued money that isn’t backed by a physical commodity, like gold, but rather by the government that issued it). 

Part of Bitcoin’s appeal is that Bitcoin’s network is decentralized, i.e., the cryptocurrency is not backed by central banks. But it could also be the very reason why it lacks true worth. 

Arguably, Bitcoin’s value is similar to that of precious metals, as both are limited in quantity and have unique uses. Like gold, which can be used in industrial processes, Bitcoin’s underlying technology, the blockchain, can be utilized across the financial services industries. In addition, like gold, the primary source of value for Bitcoin is its scarcity, as it’s limited to a quantity of 21 million. Therefore, its value lies in restricted supply and increasing demand.

Another theory is that Bitcoin does have intrinsic value based on the marginal expense of producing one Bitcoin, as mining for Bitcoins involves a tremendous amount of electricity, imposing an immense cost on miners. 

According to economic theory, in a competitive market, the selling price of a product will lean towards its marginal cost of production. And empirical evidence has shown that the price of a Bitcoin tends to follow the cost of production.

When it comes to Bitcoin’s value as an investment, some investors have indeed turned to Bitcoin since they view it as uncorrelated with stocks, making it a solid option for diversifying their portfolio. However, since its price is highly volatile, having a lower portfolio allocation to crypto can help boost returns while bolstering from significant losses.

NFTs intrinsic value

Non-fungible tokens ( NFTs ) are one-of-a-kind cryptographic tokens that exist on a blockchain and cannot be replicated. NFTs were created in 2014 and can digitally represent any asset, including online-only assets like digital artwork, metaverse items like avatars, digital and non-digital collectibles, domain names, and event tickets.

NFTs are thought to have hardly any value apart from the cost a consumer is willing to pay for them, precisely because they are not tradable and cannot be exchanged. Consequently, the value of an NFT depends on how much people want to own it and its type. But, of course, these value definitions can be exceptionally subjective, making NFTs’ value fluctuate depending on their scarcity and how much enjoyment people will receive from owning them. 

When it comes to NFTs, the intrinsic value is the enjoyment that a person gets from knowing they own a certain NFT. Therefore, the more pleasure they think they will get from it, the more they are prepared to pay for the NFT, thus increasing its value.

Pros and cons of using intrinsic value

Even though intrinsic value calculation may not be a foolproof method of mitigating all losses to your portfolio, it does provide a more unambiguous indication of a company’s financial health. However, like any evaluation process, it comes with its own set of unique advantages and disadvantages. 

• Helpful at determining the value of an asset, an investment, or a company;
• Can expose undervalued or discounted investment opportunities;
• Shows the amount of profit that exists in options contracts. 
• The intrinsic value of options doesn’t show the complete picture, as it’s missing extrinsic value factors like time value;
• There isn’t an entirely accurate method to calculate intrinsic value because it relies on future cash flows and risk estimations;
• It is a subjective analysis method, as the assumptions used to make a present value measurement can vary between analysts, and the intrinsic value is sensitive to any changes in the model used to determine it;
• It is only a projection of the future and not an accurate measure;
• The intrinsic value of an option is preliminary since it doesn’t include the premium paid and time value. 

In conclusion 

Intrinsic value helps investors recognize when stocks are undervalued or trading below their true worth, as well as estimate how a business will evolve, including its growth rate, margins, and investment levels. So, it’s a particularly handy tool for value investors looking to find profitable investment opportunities. 

However, investors must be careful before using intrinsic value as an analysis metric. While some analysts might undervalue a stock, others may overvalue it. Therefore, each measurement method must be thoroughly scrutinized before being accepted as a valuable decision tool. 

Disclaimer : The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk. 

FAQs about intrinsic value

What is intrinsic value.

Intrinsic value estimates an asset’s, investment’s, or a company’s worth based on a financial model. The term often refers to the work of financial analysts who evaluate what they deem to be the intrinsic value of a particular stock outside of its perceived market price on any given day.

How do I calculate intrinsic value?

Intrinsic value evaluations are done through fundamental and technical analysis and include several methods that consider qualitative, quantitative, and perceptual factors. Techniques include Discounted cash flow (DCF), Dividend Discount Model, asset-based valuation, and analysis based on a financial metric. 

Why is intrinsic value useful?

The disparity between market price and an analyst’s calculated intrinsic value can be a useful measure of investing opportunity. Knowing an investment’s intrinsic value is especially helpful to value investors with the goal of purchasing undervalued stocks or other assets at a discount. 

What is intrinsic value in options?

The intrinsic value in options trading refers to the difference between the current market price of an underlying asset and the exercise price of an option. For example, the intrinsic value of a call option is the current price of the stock minus the option’s strike price. Likewise, the intrinsic value of a put option is the strike price minus the underlying stock’s current price. When the calculated value is negative, the intrinsic value is zero (there is no intrinsic value). 

How to calculate the intrinsic value of a call option?

The intrinsic value of a call option is the difference between the stock’s current market price and the option’s strike price. For instance, if you have a call option for Company ABC with a strike price of $50 and the stock is currently trading at $55, the call’s intrinsic value is $5 ($55 – $50). If the stock is trading below the strike price, say $45, the intrinsic value of the call option is $0, as you wouldn’t exercise the option to buy at a higher price.

What is intrinsic value vs. market value in finance?

Intrinsic value is an estimate of the “true” or “real” value of an asset based on fundamental factors. On the other hand, market value is the current price at which the asset is being traded in the market. While intrinsic value is more theoretical and may differ from investor to investor, market value is objective and can be directly observed.

What is intrinsic value in economics?

In economics, intrinsic value refers to the actual worth of a good or service based solely on its inherent properties and functionalities, devoid of any external influences or perceptions. For instance, the intrinsic value of gold might be seen in its use in electronics or jewelry, irrespective of speculative demand.

What is the intrinsic value of a stock?

The intrinsic value of a stock refers to an estimation of a stock’s “true” value based on fundamental analysis, taking into account both tangible and intangible factors. It’s the perceived value of the stock, irrespective of its current market price.

What is the intrinsic value of a company?

The intrinsic value of a company is an estimation of its actual worth based on factors like its earnings, assets, liabilities, growth prospects, and other fundamental aspects. It’s essentially what the company is really worth, irrespective of its current market capitalization.

What is the difference between intrinsic vs instrumental value?

Intrinsic value refers to the inherent worth of something, such as a painting’s value based on its artistic merit or a stock’s value determined through fundamental analysis of earnings and growth prospects, representing its true worth regardless of market price. Conversely, instrumental value is about the utility of something in achieving other objectives, like money’s ability to purchase goods and services, highlighting its role as a means to an end.

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24 Intrinsic Value and the Notion of a Life

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• Published: October 2006
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This essay explores the notion of intrinsic value. It is argued that a richly sentient life being a certain way is the only possible subject of a defensible judgement of intrinsic value. One consequence of this thesis is a disagreement with G. E. Moore regarding the intrinsic value of a beautiful world devoid of sentience, a famous thought experiment from his Principia Ethica . But a more important consequence is the underlining of an intimate connection between the notion of a richly sentient life and the very idea of intrinsic value.

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What Is the Intrinsic Value of a Stock?

Dividend discount models, residual income models, discounted cash flow models, why intrinsic value matters, the bottom line.

• Fundamental Analysis

Intrinsic Value of a Stock: What It Is and Formulas to Calculate It

Gordon Scott has been an active investor and technical analyst or 20+ years. He is a Chartered Market Technician (CMT).

Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.

Intrinsic value is a philosophical concept wherein the worth of an object or endeavor is derived in and of itself—or, in layman's terms, independently of other extraneous factors. Financial analysts build models to estimate what they consider to be the intrinsic value of a company's stock outside of what its perceived market price may be on any given day.

The discrepancy between market price and an analyst's estimated intrinsic value becomes a measure of investing opportunity. Those who consider such models to be reasonably good estimations of intrinsic value and who would take investing action based on those estimations are known as value investors.

Some investors may prefer to act on a hunch about the price of a stock without considering its corporate fundamentals. Others may base their purchase on the price action of the stock regardless of whether it is driven by excitement or hype. However, in this article, we will look at another way of figuring out the intrinsic value of a stock, which reduces the subjective perception of a stock's value by analyzing its fundamentals and determining its worth in and of itself (in other words, how it generates cash).

Key Takeaways

• Intrinsic value refers to some fundamental, objective value contained in an object, asset, or financial contract. If the market price is below that value it may be a good buy—if above, a good sale.
• When evaluating stocks, there are several methods for arriving at a fair assessment of a share's intrinsic value.
• Models utilize factors such as dividend streams, discounted cash flows, and residual income.
• Each model relies crucially on good assumptions. If the assumptions used are inaccurate or erroneous, then the values estimated by the model will deviate from the true intrinsic value.

When figuring out a stock's intrinsic value, cash is king. Many models calculate the fundamental value of a security factor in variables largely pertaining to cash (e.g., dividends and future cash flows) and utilize the time value of money (TVM). One popular model for finding a company's intrinsic value is the dividend discount model (DDM). The basic formula of the DDM is as follows:

Value of stock = E D P S ( C C E − D G R ) where: E D P S = Expected dividend per share C C E = Cost of capital equity D G R = Dividend growth rate \begin{aligned}&\text{Value of stock} =\frac{EDPS}{(CCE-DGR)}\\&\textbf{where:}\\&EDPS=\text{Expected dividend per share}\\&CCE=\text{Cost of capital equity}\\&DGR=\text{Dividend growth rate}\end{aligned} ​ Value of stock = ( CCE − D GR ) E D PS ​ where: E D PS = Expected dividend per share CCE = Cost of capital equity D GR = Dividend growth rate ​

Intrinsic value may also refer to the in-the-money value of an options contract. In this article, we concern ourselves only with valuing stocks and will ignore intrinsic value as it applies to call and put options .

One variety of this dividend-based model is the Gordon Growth Model (GGM), which assumes the company in consideration is within a steady state—that is, with growing dividends in perpetuity . It is expressed as the following:

P = D 1 ( r − g ) where: P = Present value of stock D 1 = Expected dividends one year from the present R = Required rate of return for equity investors G = Annual growth rate in dividends in perpetuity \begin{aligned} &P=\frac{D_1}{(r-g)}\\ &\textbf{where:}\\ &P=\text{Present value of stock}\\ &D_1=\text{Expected dividends one year from the present}\\ &R=\text{Required rate of return for equity investors}\\ &G=\text{Annual growth rate in dividends in perpetuity} \end{aligned} ​ P = ( r − g ) D 1 ​ ​ where: P = Present value of stock D 1 ​ = Expected dividends one year from the present R = Required rate of return for equity investors G = Annual growth rate in dividends in perpetuity ​

As the name implies, it accounts for the dividends that a company pays out to shareholders, which reflects on the company's ability to generate cash flows. There are multiple variations of this model, each of which factors in different variables depending on what assumptions you wish to include. Despite its very basic and optimistic assumptions, the GGM has its merits when applied to the analysis of blue-chip companies and broad indices.

Another such method of calculating this value is the residual income model, which expressed in its simplest form is as follows:

V 0 = B V 0 + ∑ R I t ( 1 + r ) t where: B V 0 = Current book value of the company’s equity R I t = Residual income of a company at time period  t r = Cost of equity \begin{aligned} &V_0=BV_0+\sum\frac{RI_t}{(1+r)^t}\\ &\textbf{where:}\\ &BV_0=\text{Current book value of the company's equity}\\ &RI_t=\text{Residual income of a company at time period }t\\ &r=\text{Cost of equity} \end{aligned} ​ V 0 ​ = B V 0 ​ + ∑ ( 1 + r ) t R I t ​ ​ where: B V 0 ​ = Current book value of the company’s equity R I t ​ = Residual income of a company at time period  t r = Cost of equity ​

The key feature of this formula lies in how its valuation method derives the value of the stock based on the difference in earnings per share and per-share book value (in this case, the security's residual income) to arrive at the intrinsic value of the stock.

Essentially, the model seeks to find the intrinsic value of the stock by adding its current per-share book value with its discounted residual income (which can either lessen the book value or increase it).

Finally, the most common valuation method used to find a stock's fundamental value is the discounted cash flow (DCF) analysis. In its simplest form, it resembles the DDM:

D C F = C F 1 ( 1 + r ) 1 + C F 2 ( 1 + r ) 2 + C F 3 ( 1 + r ) 3 + ⋯ C F n ( 1 + r ) n where: C F n = Cash flows in period  n d =  Discount rate, Weighted Average Cost of Capital  (WACC) \begin{aligned} &DCF=\frac{CF_1}{(1+r)^1}+\frac{CF_2}{(1+r)^2}+\frac{CF_3}{(1+r)^3}+\cdots\frac{CF_n}{(1+r)^n}\\ &\textbf{where:}\\ &CF_n=\text{Cash flows in period }n\\ & \begin{aligned} d=&\text{ Discount rate, Weighted Average Cost of Capital}\\ &\text{ (WACC)} \end{aligned} \end{aligned} ​ D CF = ( 1 + r ) 1 C F 1 ​ ​ + ( 1 + r ) 2 C F 2 ​ ​ + ( 1 + r ) 3 C F 3 ​ ​ + ⋯ ( 1 + r ) n C F n ​ ​ where: C F n ​ = Cash flows in period  n d = ​  Discount rate, Weighted Average Cost of Capital  (WACC) ​ ​

Using DCF analysis, you can determine a fair value for a stock based on projected future cash flows. Unlike the previous two models, DCF analysis looks for free cash flows —that is, cash flows that exclude the non-cash expenses of the income statement (such as depreciation) and include spending on equipment and assets as well as changes in working capital. It also utilizes WACC as a discount variable to account for the TVM.

Why does intrinsic value matter to an investor? In the models listed above, analysts employ these methods to see whether or not the intrinsic value of a security is higher or lower than its current market price, allowing them to categorize it as "overvalued" or "undervalued." Typically, when calculating a stock's intrinsic value, investors can determine an appropriate margin of safety , wherein the market price is below the estimated intrinsic value.

By leaving a "cushion" between the lower market price and the price you believe it's worth, you limit the amount of downside you would incur if the stock ends up being worth less than your estimate.

For instance, suppose in one year you find a company that you believe has strong fundamentals coupled with excellent cash flow opportunities. That year it trades at $10 per share, and after figuring out its DCF, you realize that its intrinsic value is closer to $15 per share: a bargain of $5. Assuming you have a margin of safety of about 35%, you would purchase this stock at the $10 value. If its intrinsic value drops by $3 a year later, you are still saving at least $2 from your initial DCF value and have ample room to sell if the share price drops with it.

For a beginner getting to know the markets, intrinsic value is a vital concept to remember when researching firms and finding bargains that fit within their investment objectives . Though not a perfect indicator of the success of a company , applying models that focus on fundamentals provides a sobering perspective on the price of its shares.

How Do You Find the Intrinsic Value of a Stock?

To find the intrinsic value of a stock, calculate the company's future cash flow, then calculate the present value of the estimated future cash flows. Add up all of the present values, which will be the intrinsic value.

How Do You Know If a Stock Is Undervalued?

There are a few ways to determine whether a stock is undervalued . One method is to look at a company's price-to-earnings (P/E) ratio, which is its stock price divided by its earnings per share. If a company's P/E ratio is below that of its competitors or the overall market, then it may be undervalued.

What Is the Difference Between Market Value and Intrinsic Value?

Market value is the current stock price of a company which is based on supply and demand and can fluctuate due to many factors, such as opinions and feelings. Intrinsic value, on the other hand, is a company's true value, which can be thought of as the actual worth of a company, taking into consideration the value of its assets and liabilities.

Every valuation model ever developed by an economist or financial academic is subject to the risk and volatility that exists in the market as well as the sheer irrationality of investors. Though calculating intrinsic value may not be a guaranteed way of mitigating all losses to your portfolio, it does provide a clearer indication of a company's financial health .

Value investors and others who prefer to select investments based on business fundamentals consider this indication a vital component for successfully picking stocks intended for long-term holdings. From their point of view, picking stocks with market prices below their intrinsic value can help save money when building a portfolio.

Although a stock may be climbing in price in one period, if it appears overvalued , it may be best to wait until the market brings it down to below its intrinsic value to realize a bargain. This not only saves you from deeper losses, but it also allows for wiggle room to allocate cash into other, more secure investment vehicles such as bonds and T-bills.

• Valuing a Company: Business Valuation Defined With 6 Methods 1 of 37
• What Is Valuation? 2 of 37
• Valuation Analysis: Meaning, Examples and Use Cases 3 of 37
• Financial Statements: List of Types and How to Read Them 4 of 37
• Balance Sheet: Explanation, Components, and Examples 5 of 37
• Cash Flow Statement: How to Read and Understand It 6 of 37
• 6 Basic Financial Ratios and What They Reveal 7 of 37
• 5 Must-Have Metrics for Value Investors 8 of 37
• Earnings Per Share (EPS): What It Means and How to Calculate It 9 of 37
• P/E Ratio Definition: Price-to-Earnings Ratio Formula and Examples 10 of 37
• Price-to-Book (PB) Ratio: Meaning, Formula, and Example 11 of 37
• Price/Earnings-to-Growth (PEG) Ratio: What It Is and the Formula 12 of 37
• Fundamental Analysis: Principles, Types, and How to Use It 13 of 37
• Absolute Value: Definition, Calculation Methods, Example 14 of 37
• Relative Valuation Model: Definition, Steps, and Types of Models 15 of 37
• Intrinsic Value of a Stock: What It Is and Formulas to Calculate It 16 of 37
• Intrinsic Value vs. Current Market Value: What's the Difference? 17 of 37
• The Comparables Approach to Equity Valuation 18 of 37
• The 4 Basic Elements of Stock Value 19 of 37
• How to Become Your Own Stock Analyst 20 of 37
• Due Diligence in 10 Easy Steps 21 of 37
• Determining the Value of a Preferred Stock 22 of 37
• Qualitative Analysis 23 of 37
• How to Choose the Best Stock Valuation Method 24 of 37
• Bottom-Up Investing: Definition, Example, Vs. Top-Down 25 of 37
• Financial Ratio Analysis: Definition, Types, Examples, and How to Use 26 of 37
• What Book Value Means to Investors 27 of 37
• Liquidation Value: Definition, What's Excluded, and Example 28 of 37
• Market Capitalization: What It Means for Investors 29 of 37
• Discounted Cash Flow (DCF) Explained With Formula and Examples 30 of 37
• Enterprise Value (EV) Formula and What It Means 31 of 37
• How to Use Enterprise Value to Compare Companies 32 of 37
• How to Analyze Corporate Profit Margins 33 of 37
• Return on Equity (ROE) Calculation and What It Means 34 of 37
• Decoding DuPont Analysis 35 of 37
• How to Value Private Companies 36 of 37
• Valuing Startup Ventures 37 of 37

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• Intrinsic Value

Written by True Tamplin, BSc, CEPF®

Reviewed by subject matter experts.

Updated on June 08, 2023

Get Any Financial Question Answered

Table of contents, what is the meaning of intrinsic value.

Intrinsic value refers to the true or fundamental value of an asset based on its underlying characteristics and properties, independent of external factors such as market conditions , supply and demand , and investor sentiment.

It is an objective measure of an asset's value, which can be used to determine whether an asset is overvalued, undervalued , or fairly priced. Intrinsic value is commonly used in the fields of investing and business, but it can be applied to anything that has value.

Knowing an asset's intrinsic value allows investors to make informed decisions about whether to buy, hold, or sell, while business owners can use intrinsic value to determine the worth of their company and make strategic decisions about growth and development.

Understanding Intrinsic Value

Understanding intrinsic value is crucial for investors and business owners because it provides an objective and fundamental measure of an asset's worth based on its inherent characteristics and properties.

It allows investors to determine the true value of an asset, independent of external factors such as market volatility and investor sentiment. By understanding the intrinsic value of an asset, investors can make informed decisions about whether to buy, hold, or sell the asset.

If an asset's intrinsic value is higher than its market value , it may be undervalued, and there may be an opportunity for growth and appreciation.

On the other hand, if an asset's intrinsic value is lower than its market value, it may be overvalued, and it may be prudent to avoid investing in it.

For business owners, understanding the intrinsic value of their company is crucial for determining the company's worth and making informed decisions about growth and development.

By assessing the company's intrinsic value, business owners can identify areas where the company may be undervalued and where there may be opportunities for growth and expansion.

They can also identify areas where the company may be overvalued and where strategic changes may be necessary to improve its intrinsic value.

Understanding intrinsic value is essential for investors and business owners alike. Intrinsic value provides a fundamental basis for determining whether an asset is worth investing in or not.

Methods of Calculating Intrinsic Value

There are various methods of calculating intrinsic value, depending on the type of asset being evaluated, including:

Discounted Cash Flow Analysis

This method requires the investor to estimate the future cash flows of the asset, the rate of return that investors require for investing in the asset, and the expected growth rate of the cash flows.

The present value of the discounted cash flows represents the asset's intrinsic value.

Earning Multiples

The method of earnings multiples involves using a company's earnings or cash flows to estimate its intrinsic value. The most common earnings multiples used are the price-to-earnings ratio and the price-to-cash-flow ratio.

These ratios are calculated by dividing the current market price of the asset by its earnings or cash flows per share. The resulting ratio represents the number of times the market is willing to pay for the asset's earnings or cash flows.

Asset-Based Valuation

This involves looking at the value of a company's assets and liabilities to determine its intrinsic value.

Additionally, it involves subtracting the value of a company's liabilities from the value of its assets to arrive at its net asset value (NAV) . The NAV represents the intrinsic value of the company.

Examples of Intrinsic Value in Investing

Intrinsic value is commonly used in the valuation of various types of assets, including stocks, bonds, and real estate:

An example of intrinsic value in investing is the valuation of stocks . Investors can use various methods to calculate the intrinsic value of a stock, including discounted cash flow analysis , price-to-earnings ratios, and price-to-book ratios.

If a stock's intrinsic value is higher than its market value, it may be a good investment opportunity, while if its intrinsic value is lower than its market value, it may be overvalued and not worth investing in.

Intrinsic value is also used in the valuation of bonds . The intrinsic value of a bond represents the present value of its future cash flows, which are the coupon payments and the principal payment at maturity.

The present value of the cash flows is calculated using the bond's yield to maturity, which is the rate of return that investors require for investing in the bond.

If a bond's intrinsic value is higher than its market value, it may be a good investment opportunity, while if its intrinsic value is lower than its market value, it may be overvalued and not worth investing in.

Real Estate

Intrinsic value is also used in the valuation of real estate. The intrinsic value of a property represents the present value of its future cash flows, which are the rental income and the resale value.

The present value of the cash flows is calculated using the property's net operating income (NOI) and a capitalization rate (cap rate), which is the rate of return that investors require for investing in the property.

If a property's intrinsic value is higher than its market value, it may be a good investment opportunity, while if its intrinsic value is lower than its market value, it may be overvalued and not worth investing in.

Factors That Contribute to Intrinsic Value

Various factors contribute to an asset's intrinsic value, depending on the type of asset being evaluated. Some of the most common factors that contribute to intrinsic value include:

Earnings: Earnings are a significant factor in the valuation of stocks and other types of assets. The higher a company's earnings, the higher its intrinsic value is likely to be.

Cash Flows: Cash flows are also an essential factor in the valuation of assets. The higher the asset's cash flows, the higher its intrinsic value is likely to be.

Growth Potential: The growth potential of an asset is another factor that contributes to its intrinsic value. Assets with high growth potential are more likely to have a higher intrinsic value than those with lower growth potential.

Competitive Advantages: Competitive advantages such as brand reputation, intellectual property, and customer base can also contribute to an asset's intrinsic value.

Market Conditions: Market conditions can also influence an asset's intrinsic value. For example, during times of economic uncertainty, the intrinsic value of stocks and other assets may be lower due to increased risk and volatility.

Intrinsic Value vs Extrinsic Value

Intrinsic value and extrinsic value are two different concepts that are often used in investing and finance.

Extrinsic value refers to the value of an asset beyond its intrinsic value, such as the value that investors are willing to pay for a stock due to market demand or speculation.

Extrinsic value can be influenced by external factors, such as market sentiment and supply and demand. Intrinsic value, on the other hand, is the true or fundamental value of an asset based on its underlying characteristics, independent of external factors.

While extrinsic value can be volatile and subject to market fluctuations, intrinsic value provides a more stable and objective measure of an asset's worth.

Final Thoughts

Intrinsic value is a fundamental concept in investing and business, providing an objective measure of an asset's worth based on its underlying characteristics and properties.

Understanding intrinsic value is essential for investors and business owners alike, as it allows them to make informed decisions about whether to buy, hold, or sell an asset.

Calculating intrinsic value requires an understanding of the specific asset being evaluated and the appropriate valuation methods . Some of the most common methods include discounted cash flow analysis, earnings multiples, and asset-based valuation.

Factors that contribute to intrinsic value vary depending on the type of asset being evaluated, but they generally include earnings, cash flows, growth potential, competitive advantages, and market conditions. For more information on how to calculate intrinsic value and apply it to your own circumstances, you may consult a wealth management professional.

Intrinsic Value FAQs

What is intrinsic value, and why is it important in investing and business.

Intrinsic value refers to the true or fundamental value of an asset based on its underlying characteristics and properties, independent of external factors. It is important in investing and business as it provides an objective measure of an asset's worth, allowing investors and business owners to make informed decisions.

How is intrinsic value calculated for stocks and bonds?

Intrinsic value for stocks and bonds can be calculated using various methods, including discounted cash flow analysis and earnings multiples. The present value of the cash flows represents the asset's intrinsic value.

What factors contribute to an asset's intrinsic value?

Factors that contribute to an asset's intrinsic value include earnings, cash flows, growth potential, competitive advantages, and market conditions.

What is the difference between intrinsic value and extrinsic value?

Intrinsic value is the true or fundamental value of an asset based on its underlying characteristics and properties, independent of external factors. Extrinsic value, on the other hand, refers to the value of an asset beyond its intrinsic value, influenced by external factors such as market demand and sentiment.

Why is it essential for business owners to understand the intrinsic value of their company?

Understanding the intrinsic value of their company allows business owners to determine the company's worth and make informed decisions about growth and development. By assessing the company's intrinsic value, business owners can identify areas where the company may be undervalued and where there may be opportunities for growth and expansion.

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide , a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University , where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon , Nasdaq and Forbes .

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Intrinsic Value

It is a measure that helps investors calculate the worth of an investment or asset

Before deciding to pursue his  MBA , Andy previously spent two years at Credit Suisse in Investment Banking, primarily working on  M&A  and  IPO  transactions. Prior to joining Credit Suisse, Andy was a Business Analyst Intern for  Capital One  and worked as an associate for Cambridge Realty Capital Companies.

Andy graduated from University of Chicago with a Bachelor of Arts in Economics and Statistics and is currently an  MBA  candidate at The University of Chicago Booth School of Business with a concentration in Analytical Finance.

What Is Intrinsic Value?

Understanding intrinsic value.

• How To Calculate Intrinsic Value?

Intrinsic Value Example

• Intrinsic Value Of Options Contracts

Intrinsic value is a measure that helps investors calculate the worth of an investment or asset. This measure is derived from objective calculation or complex financial models. This value and the current market value of an asset or investment are two completely different measures.

With its help, one can quickly determine if the assets or investments are overvalued or undervalued by comparing the current market value with this.

The financial analyst uses cash flow to determine the intrinsic value of a company or stock. It is also used in option pricing, as options pricing is the difference between the options' strike price and the underlying assets' current market price.

Discounted Cash Flow (DCF) is the primary metric used to determine the intrinsic value of assets or investments. 

Using this method, the value of an asset is derived from the expected future cash flow, which will be discounted later with the rate which shows the risk associated with the purchase or company.

The utilization of intrinsic value and discounted cash flow (DCF) for value investing was pioneered by  Benjamin Graham  and  David Dodd  of the Columbia Business School in the 1920s. 

This value investing method was popularized by Warren Buffet, who himself has used this method for a very long time since the 1950s.

Key Takeaways

• Intrinsic value measures an asset's worth, separate from its market value. It aids in assessing overvaluation or undervaluation by comparing these two values.
• Discounted Cash Flow (DCF) is the primary method to compute intrinsic value. It involves estimating future cash flows, discounted to present value, using risk factors.
• Business model, governance, and target market are qualitative aspects considered to determine intrinsic value, influencing long-term success and investor decisions.
• Financial performance, ratios, and statement analysis provide quantitative insights into an asset's intrinsic value, assessing profitability, growth, and health.
• Intrinsic value is used in option pricing, assessing the difference between stock price and strike price. External factors like time to expiration also influence an option's total value.

You can still calculate the fee of an enterprise or an asset in multiple ways. Financial analysts commonly determine an asset's price through fundamental and technical evaluation to recognize its overall financial performance .

There are one-of-a-kind approaches to constructing a valuation version, using qualitative, quantitative, and perceptual business factors simultaneously as the metric regularly used within the calculation for intrinsic value is Discounted coins.

DCF evaluation is a famous method used to determine intrinsic value. It calculates the current value of all future cash flows that investment is predicted to generate, discounted back to its current fee. 

The buyers use qualitative and quantitative elements to determine the agency's price and remember that the cost is an estimate simplest and would not constitute the asset's actual price.

Qualitative elements which can be used to determine the fee of the asset or organization are:

1 .  Business Model 

An enterprise version is a qualitative thing that describes how an organization generates revenue and earnings. A sound business version can lead to a sustainable and worthwhile increase, at the same time as a possible fallacious cause of failure.

After analyzing an agency's business model, traders can decide its ability for lengthy-time period fulfillment and have its competitive blessings.

2. Governance 

Governance refers to regulations, practices, and methods by which a company is directed and managed. It is far from an element that may impact an investor's choice to invest in the corporation. 

It could help ensure that a company is managed successfully, ethically, and in the pleasant pursuits of all stakeholders. 

3. Target Market

Target market refers to the organization of customers to whom an enterprise intends to sell its products or services. It is far from a qualitative factor as it enables deciding to call for revenue for a corporation's products or services.

Quantitative elements which might be used are:

1.  Financial performance

Financial overall performance is a quantitative factor that refers to an agency's beyond and gift economic consequences. It consists of measures along with sales, profits, cash waft, go back on investment, and other monetary ratios.

Economic overall performance  is a crucial issue that helps calculate a funding's price as it offers a brief understanding of the agency's profitability, boom capacity, and economic health.

2. Financial ratios

Financial ratios work as quantitative measures which can be used to assess an enterprise's financial fitness and are considered one of the crucial elements at the same time as figuring out the intrinsic price of a company.

The P/E ratio, P/S ratio, return on equity ( ROE ), and debt-to-fairness ratio are the most commonly used financial ratios.

3. Financial statement analysis

Financial assertion analysis is a quantitative element of intrinsic cost that involves evaluating an agency's monetary statements to evaluate its economic health and performance. 

It analyzes factors, including revenue growth, profitability, coins float, debt degrees, and asset utilization, to decide the organization's intrinsic value. 

Perceptual elements consult with traders' belief of the worth of the asset or organization.

Intrinsic value can also be considered the business's worth and determined by selling off the business and its assets.

How to Calculate Intrinsic Value?

To calculate it, assets and the company's Discounted Cash Flow (DCF) will be used, and the cash flow will be the estimate based on the business in the future.

Those cash flows will later be discounted according to today's value to obtain the company's or asset's intrinsic value. Discounted rate used here is usually the risk-free rate of treasury bonds .

DCF = CF1 / (1+r)1 + CF2 / (1+r)2 + … + TV / (1+r)n

• DCF: Discounted Cash Flow
• CF: Cash Flow in years
• TV: Terminal Value
• r: The discount Rate

Let us understand this concept with an example: the earning from share A is $100 for the latest year, and the share price is $1,000, making P/E 10 (1,000/100). Then, calculate DCF by using a growth rate of 7% and discounting rate of 3%:

The projection of DCF for five years is as follows:

Year 1: $103.88 ((100 x 1.07^1) / (1.03)^1)

Year 2: $112.10 ((103.88 x 1.07^2) / (1.03)^2)

Year 3: $125.67 ((112.10 x 1.07^3) / (1.03)^3)

Year 4: $146.35 ((125.67 x 1.07^4) / (1.03)^4)

Year 5: $170.44 ((146.35 x 1.07^5) / (1.03)^5)

The total discounted Cash flow is $685.44. The terminal value of the share can be calculated by multiplying the final year's earnings by 15. That’s $170.44 x 10 = $1,704.4, and the discounted Terminal value is $1,470.23 ($1,704.4 / 1.035).

Now, we have to combine the terminal value and DCF of 5 years, which is:

$685.44 + $1,470.23 = $2,155.67

Thus, the share is undervalued and has the potential to grow as the Intrinsic value ($2,155.67) is more than the market value ($1,000).

Intrinsic Value of Options Contracts

It is also used to determine the profit in the option pricing. An option contract gives the buyer the right to buy or sell the underlying security but not the obligation at a preset price called Strike Price.

These options have an expiration date before which they must be completed or converted into the shares of the securities mentioned under it.

The intrinsic value of the call and put options can be determined by the difference between the stock's price and the strike price of that investment. The Value is Zero when the difference is negative.

It only helps determine the expected profit, calculated by the difference between the option's strike and market prices. Many other external factors can affect the option's value and resulting premium. For example, factors like time left till expiration are also considered.

When the strike price and the market price are equal, there is no Intrinsic value, and there may be any other external factor driving the option's price. Both the Intrinsic value and the value from external factors combine to make up the total value of an option’s price.

Everything You Need To Master Valuation Modeling

To Help You Thrive in the Most Prestigious Jobs on Wall Street.

Researched and authored by Ashish Jangra | Linkedin

Reviewed and edited by Parul Gupta | LinkedIn

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Warren Buffett’s 7 Rules of Investing

W arren Buffett, often hailed as the greatest investor of all time, has amassed a fortune by adhering to a set of fundamental principles that transcend market trends and economic cycles. From humble beginnings, Buffett built an investment empire that has yielded staggering returns for his shareholders. But what are the secrets behind Buffett’s success? In this article, we’ll uncover Warren Buffett’s seven rules of investing in a YouTube video from FREENVESTING .

Check Out: I’m a Self-Made Millionaire: 5 Stocks You Shouldn’t Sell

Learn More: 6 Unusual Ways To Make Extra Money (That Actually Work)

Sponsored: Protect Your Wealth With A Gold IRA. Take advantage of the timeless appeal of gold in a Gold IRA recommended by Sean Hannity.

1. The Three Traits Buffett Looks for in People

When it comes to hiring, Buffett prioritizes three key traits: intelligence, initiative (or energy), and integrity. He emphasizes that integrity is paramount, as lacking it can undermine even the brightest and most energetic individuals. Buffett’s emphasis on integrity underscores the importance of trustworthiness and ethical conduct in both business and life.

2. Human Behavior and Market Opportunities

Buffett highlights the role of human behavior in driving market fluctuations. He observes that investors often exhibit herd mentality, chasing after past successes or fleeing from perceived failures. This behavior creates opportunities for astute investors who can resist the allure of the crowd and remain focused on intrinsic value.

3. Moving Beyond the “Cigar Butt” Approach

In his early years, Buffett adopted a “cigar butt” approach to investing, seeking out undervalued stocks with one last puff of value. However, he later recognized the limitations of this strategy, preferring to invest in wonderful businesses at fair prices rather than fair businesses at wonderful prices. This shift in mindset reflects Buffett’s evolution as an investor and his emphasis on quality over quantity.

4. Staying Within Your Circle of Competence

Buffett advises investors to stick to areas they understand and avoid venturing into unfamiliar territory. He emphasizes the importance of assessing the economic fundamentals of a business and understanding its competitive advantages. By staying within their circle of competence, investors can make informed decisions aligned with their expertise.

5. Learning from Mistakes of Omission

Buffett acknowledges that his biggest mistakes have been those of omission–decisions not to invest in opportunities that were within his circle of competence. He cautions against succumbing to inertia or indecision, urging investors to seize promising opportunities when they arise. Buffett’s emphasis on learning from mistakes highlights the value of introspection and continuous improvement.

6. Seizing Big Opportunities

Buffett advises investors to seize big opportunities when they arise, emphasizing the importance of bold action and decisive decision-making. He cautions against waiting for the perfect opportunity, as it may never materialize. Instead, Buffett encourages investors to act with conviction and capitalize on opportunities that align with their long-term goals.

7. Assessing Intrinsic Value

At the core of Buffett’s investment philosophy is the concept of intrinsic value–the present value of all future cash flows generated by a business. Buffett emphasizes the importance of assessing a company’s intrinsic value before making investment decisions, as it provides a basis for evaluating its long-term prospects. By focusing on intrinsic value, investors can avoid speculative bets and make rational investment choices based on fundamentals.

Buffett’s seven rules of investing offer invaluable insights for investors seeking to navigate the complexities of the financial markets. From prioritizing integrity to seizing big opportunities and assessing intrinsic value, Buffett’s principles provide a timeless framework for building wealth and achieving financial independence. By embracing these rules and incorporating them into their investment strategies, investors can harness the power of Buffett’s wisdom to achieve their financial goals.

Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.

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This article originally appeared on GOBankingRates.com : Warren Buffett’s 7 Rules of Investing

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Yahoo Finance

An intrinsic calculation for tortilla mexican grill plc (lon:mex) suggests it's 45% undervalued, key insights.

Tortilla Mexican Grill's estimated fair value is UK£0.88 based on 2 Stage Free Cash Flow to Equity

Current share price of UK£0.48 suggests Tortilla Mexican Grill is potentially 45% undervalued

Analyst price target for MEX is UK£1.05, which is 19% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Tortilla Mexican Grill plc ( LON:MEX ) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model .

See our latest analysis for Tortilla Mexican Grill

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = UK£18m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.6%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV) = FCF 2033 × (1 + g) ÷ (r – g) = UK£5.6m× (1 + 1.6%) ÷ (13%– 1.6%) = UK£52m

Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = UK£52m÷ ( 1 + 13%) 10 = UK£16m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is UK£34m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of UK£0.5, the company appears quite undervalued at a 45% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Tortilla Mexican Grill as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 13%, which is based on a levered beta of 2.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Tortilla Mexican Grill

Debt is well covered by cash flow.

Interest payments on debt are not well covered.

Opportunity

Expected to breakeven next year.

Has sufficient cash runway for more than 3 years based on current free cash flows.

Good value based on P/S ratio and estimated fair value.

No apparent threats visible for MEX.

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Tortilla Mexican Grill, we've compiled three pertinent elements you should look at:

Risks : As an example, we've found 2 warning signs for Tortilla Mexican Grill that you need to consider before investing here.

Future Earnings : How does MEX's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart .

Other High Quality Alternatives : Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the AIM every day. If you want to find the calculation for other stocks just search here .

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