Relative Thinking Theory

Ofer H. Azar ()

Microeconomics from EconWPA

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.

Keywords: Relative thinking; relative differences; behavioral decision making; behavioral economics; psychological economics; Weber's law; absolute differences; percentages; ratios (search for similar items in EconPapers)
JEL-codes: D10 M30 L10 C91 A12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-exp and nep-hpe
Date: 2005-04-09
Note: Type of Document - pdf; pages: 27
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http://129.3.20.41/eps/mic/papers/0504/0504002.pdf (application/pdf)

Related works:
Journal Article: Relative thinking theory (2007)
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpmi:0504002

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