Relative thinking theory
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.
(This abstract was borrowed from another version of this item.)
Volume (Year): 36 (2007)
Issue (Month): 1 (February)
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- 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.
- Ofer H. Azar, 2005.
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INFORMS, vol. 27(1), pages 15-25, 01-02.
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- 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.
- Thaler, Richard, 1980. "Toward a positive theory of consumer choice," Journal of Economic Behavior & Organization, Elsevier, vol. 1(1), pages 39-60, March.
- 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.
- Frisch, Deborah, 1993. "Reasons for Framing Effects," Organizational Behavior and Human Decision Processes, Elsevier, vol. 54(3), pages 399-429, April.
- 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.
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