Monday, January 27, 2025

The Influence of Relativity: How We Compare to Make Decisions

Have you ever gone shopping for a house and been shown two modest homes followed by a third, slightly bigger but significantly more expensive one? Suddenly, the first two houses seem like great deals in comparison. This is a classic example of the influence of relativity, a psychological phenomenon that explains how we evaluate our options not in absolute terms, but by comparing them to what’s around us.

In Predictably Irrational, Dan Ariely explores how relativity shapes our decisions and why we often make choices based on comparisons rather than objective evaluations. This article unpacks the concept of relativity, its impact on consumer behavior, and how understanding it can help us make better decisions.

What Is the Influence of Relativity?

Relativity describes the human tendency to evaluate things in comparison to other options rather than on their standalone value. We rarely assess an object, service, or situation in isolation. Instead, we judge it relative to the alternatives presented to us, which can distort our perceptions and lead to irrational choices.

For example:

  • A $350,000 house might seem like a bargain when shown alongside a $450,000 house, even if it’s overpriced for the area.
  • A $5 coffee might feel expensive until you see a menu where most drinks cost $7.

Relativity is deeply ingrained in our decision-making because it simplifies complex evaluations. However, it also makes us vulnerable to manipulation by marketers, advertisers, and even our own biases.

Real-World Examples of Relativity

1. Pricing Strategies in Retail

Retailers often use relativity to nudge customers toward higher-priced items. For example:

  • A store might display a $1000 designer coat next to a $500 coat. The $500 coat feels like a bargain, even if it’s still overpriced.
  • Electronics stores often highlight a “premium” model priced at $3000 to make the $1500 mid-tier option seem more reasonable.

2. Restaurant Menus

Many restaurant menus include a highly expensive dish that few people are expected to order. Why? To make the other items look like better deals in comparison. For instance:

  • A $200 bottle of wine on the menu makes a $75 bottle feel more affordable.
  • A $50 steak dish might seem reasonable when placed next to a $100 premium steak.

3. Subscription Plans

Ariely cites an example from The Economist:

  • Online-only subscription: $59
  • Print-only subscription: $125
  • Online + Print subscription: $125

The print-only option acts as a “decoy,” making the online + print subscription seem like the best value. Without the print-only option, most people would choose the cheaper online-only subscription.

4. Travel Packages

When booking a vacation, travelers often compare different packages. A hotel offering a $300-per-night stay with complimentary breakfast might seem like a better deal than a $250-per-night option without breakfast—even if the cost of breakfast doesn’t justify the price difference.

5. Salary Negotiations

Job seekers often evaluate an offer based on the salary relative to their peers or industry standards, rather than its absolute value. A $70,000 salary may feel insufficient if friends are earning $80,000 but can seem generous if the average in the field is $60,000.

Why Does Relativity Work?

Relativity simplifies decision-making by creating a frame of reference. Instead of evaluating every possible option, we compare a few and choose the one that feels best. However, this tendency also creates several biases:

  1. Anchoring Effect: The first option we see acts as an anchor, influencing how we perceive subsequent options.
  2. Asymmetric Dominance: The presence of a “decoy” option makes another option appear more attractive by comparison.
  3. Context Dependence: Our perception of value changes based on the options presented to us, rather than the intrinsic qualities of the item itself.

How Businesses Use Relativity

  1. Tiered Pricing Models
    Businesses often offer three pricing tiers: basic, standard, and premium. The premium option is usually there to make the standard option appear like the best value, nudging most customers to choose it.

  2. Bundling and Add-Ons
    Adding an optional extra to a package makes the base price look more reasonable. For example:

  • A car dealership might show you a basic car for $25,000, a mid-tier car for $30,000, and a fully loaded car for $40,000. Most buyers gravitate toward the $30,000 option because it feels like the best balance of cost and features.
  1. High-Anchor Products
    Luxury brands often display their most expensive products prominently, knowing that these high anchors make other items in their lineup seem affordable.

The Downsides of Relativity

While relativity can help us make decisions, it can also lead to:

  1. Irrational Spending
    We might spend more than necessary because something feels like a “better deal” relative to a higher-priced option.

  2. Lost Perspective
    Focusing on comparisons can cause us to lose sight of the absolute value or necessity of an item. For example, a $100 pair of shoes might feel like a steal compared to a $200 pair but is still unnecessary if you don’t need new shoes.

  3. Manipulation by Marketers
    Marketers deliberately craft scenarios to exploit relativity, influencing our choices in ways that may not align with our best interests.

How to Overcome the Influence of Relativity

  1. Evaluate Options Independently
    Ask yourself: Would I choose this if it were the only option available? This question helps you focus on the absolute value rather than relative comparisons.

  2. Define Your Priorities
    Before shopping or negotiating, determine your budget, needs, and goals. This prevents you from being swayed by comparisons.

  3. Be Wary of Decoy Options
    When faced with multiple options, consider whether one is a decoy designed to influence your decision.

  4. Pause Before Deciding
    Take time to reflect on the true value of a product or service. Avoid making decisions based on immediate comparisons.

Final Thoughts

Relativity is a powerful force that shapes our decisions, often without us realizing it. By understanding how comparisons influence perception, we can become more mindful consumers and decision-makers.

The next time you’re shopping, dining out, or negotiating, pause and ask: Am I choosing this because it’s genuinely the best option, or does it just seem better compared to the alternatives?

With a little self-awareness, you can move beyond the influence of relativity and make choices that truly align with your needs and values.

posted by MBA Recaps @ January 27, 2025