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Relative thinking theory

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  • Azar, Ofer H.

Abstract

The article presents a theory that I denote “Relative Thinking Theory,” which claims that people consider relative differences and not only absolute differences when making various economics decisions, even in those cases where the rational model dictates that people should consider only absolute differences. The article reviews experimental evidence for this behavior, summarizing briefly several experiments I conducted, as well as some earlier related literature. It then discusses how we can think about relative thinking and formalize this behavior. Later, the article addresses several related questions: why do people exhibit relative thinking, whether it is beneficial to do so, and whether experience and education can change relative thinking. Finally, the article explains why firms seem to respond to relative thinking of consumers, and raises additional implications of relative thinking for economics and management.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics).

Volume (Year): 36 (2007)
Issue (Month): 1 (February)
Pages: 1-14

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Handle: RePEc:eee:soceco:v:36:y:2007:i:1:p:1-14

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Web page: http://www.elsevier.com/locate/inca/620175

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References

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  1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  2. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  3. Moon, Philip & Keasey, Kevin & Duxbury, Darren, 1999. "Mental accounting and decision making:: The relationship between relative and absolute savings," Journal of Economic Behavior & Organization, Elsevier, vol. 38(2), pages 145-153, February.
  4. Azar, Ofer H., 2009. "Do consumers make too much effort to save on cheap items and too little to save on expensive items? experimental results and implications for business strategy," MPRA Paper 20962, University Library of Munich, Germany.
  5. Azar, Ofer H., 2007. "Relative thinking theory," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(1), pages 1-14, February.
  6. Tversky, Amos & Kahneman, Daniel, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1039-61, November.
  7. Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
  8. Alan T. Sorensen, 2000. "Equilibrium Price Dispersion in Retail Markets for Prescription Drugs," Journal of Political Economy, University of Chicago Press, vol. 108(4), pages 833-862, August.
  9. Pratt, John W & Wise, David A & Zeckhauser, Richard, 1979. "Price Differences in Almost Competitive Markets," The Quarterly Journal of Economics, MIT Press, vol. 93(2), pages 189-211, May.
  10. Frisch, Deborah, 1993. "Reasons for Framing Effects," Organizational Behavior and Human Decision Processes, Elsevier, vol. 54(3), pages 399-429, April.
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Cited by:
  1. Pedro Bordalo & Nicola Gennaioli & Andrei Shleifer, . "Salience and Consumer Choice," Working Paper 62321, Harvard University OpenScholar.
  2. Nicola Gennaioli & Alberto Mart�n & Stefano Rossi, 2012. "Sovereign Default, Domestic Banks and Financial Institutions," Working Papers 622, Barcelona Graduate School of Economics.
  3. Azar, Ofer H., 2007. "Relative thinking theory," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 36(1), pages 1-14, February.
  4. Azar, Ofer H., 2008. "The effect of relative thinking on firm strategy and market outcomes: A location differentiation model with endogenous transportation costs," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 684-697, November.
  5. Azar, Ofer H., 2011. "Do people think about absolute or relative price differences when choosing between substitute goods?," Journal of Economic Psychology, Elsevier, vol. 32(3), pages 450-457, June.
  6. Don J. Webber & Michael Horswell, 2009. "Microeconomic foundations of geographical variations in labour productivity," Working Papers 0913, Department of Accounting, Economics and Finance, Bristol Business School, University of the West of England, Bristol.
  7. Justine Hastings & Jesse M. Shapiro, 2012. "Mental Accounting and Consumer Choice: Evidence from Commodity Price Shocks," NBER Working Papers 18248, National Bureau of Economic Research, Inc.
  8. Lynn, Michael & Jabbour, Patrick & Kim, Woo Gon, 2012. "Who uses tips as a reward for service and when? An examination of potential moderators of the service–tipping relationship," Journal of Economic Psychology, Elsevier, vol. 33(1), pages 90-103.
  9. Azar, Ofer H., 2009. "Do consumers make too much effort to save on cheap items and too little to save on expensive items? experimental results and implications for business strategy," MPRA Paper 20962, University Library of Munich, Germany.

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