Just published (to support his new book) is a fabulous article from Dan Ariely, one of the godfathers of behavioural science. In it, he explains why discounts fool us into doing things that are economically irrational.
When it is hard to measure directly the value of something, we compare it to other things, like a competing product or other versions of the same product. When we compare items, we create relative values. Now the problem isn’t with the concept of relativity itself, but with the way we apply it.
If we compared everything to all other things, we’d consider our opportunity costs and all would be well. But we don’t. We compare the item to only one other (sometimes two). This is when relativity can fool us.
So rather than looking at absolute value which is often hard, we take a shortcut and find a reference point that allows us to do a much quicker analysis of whether something is good value. Of course if that reference point is nonsense (as pre-discounted prices often are) then we’re basing our decision-making on a meaningless comparison.
I’m pretty sure this isn’t something that’s just restricted to our private lives. My guess is that we take similar shortcuts in our professional lives. And I bet the impact isn’t just financial; doing something better or cheaper than a benchmark that’s irrelevant might not be an improvement at all.
He also talks about how we use relativity to determine whether we are doing well in life. Because there’s no right answer, we look at others for a comparator. But of course we don’t know every aspect of their lives; what looks like success at work, might disguise failure at home.
You can read the full Ariely article here.