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Relative Thinking Theory

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Author Info
Ofer H. Azar (Ben-Gurion University of the Negev)

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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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File URL: http://129.3.20.41/eps/mic/papers/0504/0504002.pdf
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Publisher Info
Paper provided by EconWPA in its series Microeconomics with number 0504002.

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Length: 27 pages
Date of creation: 09 Apr 2005
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Handle: RePEc:wpa:wuwpmi:0504002

Note: Type of Document - pdf; pages: 27
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Web page: http://129.3.20.41

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Related research
Keywords: Relative thinking; relative differences; behavioral decision making; behavioral economics; psychological economics; Weber's law; absolute differences; percentages; ratios;

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Find related papers by JEL classification:
D10 - Microeconomics - - Household Behavior - - - General
M30 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - General
L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
A12 - General Economics and Teaching - - General Economics - - - Relation of Economics to Other Disciplines

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Frisch, Deborah, 1993. "Reasons for Framing Effects," Organizational Behavior and Human Decision Processes, Elsevier, vol. 54(3), pages 399-429, April. [Downloadable!] (restricted)
  4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March. [Downloadable!] (restricted)
  5. 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. [Downloadable!] (restricted)
  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. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Azar, Ofer H., 2007. "The effect of relative thinking on firm strategy and market outcomes: A location differentiation model with endogenous transportation costs," MPRA Paper 4455, University Library of Munich, Germany. [Downloadable!]
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This page was last updated on 2009-11-25.

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