Relative Thinking Theory

Ofer Azar

Microeconomics from University Library of Munich, Germany

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: A12 C91 D10 L10 M30 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2005-04-09
New Economics Papers: this item is included in nep-exp and nep-hpe
Note: Type of Document - pdf; pages: 27
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0504/0504002.pdf (application/pdf)

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

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