Relative Thinking
We naturally compare things. The circles in the center are the same size, but they appear different because we compare them to the surrounding circles.
You may think it’s just an optical illusion, but Dan Ariely conducted an interesting experiment and discovered that people act irrationally because of this phenomenon:
“When contemplating the purchase of a $25 pen, the majority of subjects would drive to another store 15 minutes away to save $7. When contemplating the purchase of a $455 suit, the majority of subjects would not drive to another store 15 minutes away to save $7. The amount saved and time involved are the same, but people make very different choices.”
People think in percentages. The subjects were willing to travel to save 28% (7/25), but not willing to travel to save 1% (7/455), even if the cost savings are the same.
Charlie Munger refers to this tendency as “contrast-misreaction” and discusses how this bias can impair clear thinking and have detrimental effects on people’s lives:
“Small-scale damages involve instances such as man’s buying an overpriced $1,000 leather dashboard merely because the price is so low compared to his concurrent purchase of a $65,000 car. Large- scale damages often ruin “lives, as when a wonderful woman having terrible parents marries a man who would be judged satisfactory only in comparison to her parents. Or as when a man takes wife number two who would be appraised as all right only in comparison to wife number one.” Charlie Munger, Harvard University, 1995