How relativity affects every decision we make: an experiment in making $20K worth more than $20K
Friday, October 9, 2009 at 06:58PM In the video above and in the his other works, the first point behavioral economist Dan Ariely is always quick to make is that we're horrendously bad at knowing what we want, and when it comes to decision-making we always always always make comparisons, relying heavily on relative context as a way to deal with the overwhelming complexity of most decisions we're faced with (see also: Barry Schwartz's The Paradox of Choice).
The idea behind relative context explains why the highest priced items on a menu boost revenue (even if they are never ordered), and why we're drawn to mid-level options among groups of three or more, using the more extreme alternatives as guides to narrow down 'what we're really looking for.'
As for supporting the idea that we use context to deal with complexity, Ariely points to examples that illustrate the principle "when given the choice between option A, option B, and option -A (similar to A but easily determined to be worse), we choose option A," demonstrating that we tend to focus on things that are easily comparable. When deciding upon purchasing a colonial home, a contemporary home of the same value, or a contemporary home of the same value with the price lowered because of a roof that needs to be fixed, we forego the more abstract decision between colonial and contemporary for a decision based on the roof instead. The 'Rome vs France vs Rome Without Coffee' and the 'Tom vs Jerry vs Slightly Less Attractive Tom (or Jerry)' examples reiterate the point, illustrated below.
It occurred to me to play on the impressionability of our decision-making with an experiment of my own. My goal was to observe the different decisions made when people were posed with the hypothetical choice between staying in a city they loved (let's say a 9 on a 10 scale) with a job paying a particular salary, or to move to another, less-than-ideal city (7 on a scale of 10) for the same job paying an increased salary. The idea is that given all other things equal, the decision would (read: should) be made based on the increase in salary alone.
To illustrate the importance of local relativity, half of the college students I approached were asked to make the above decision while imagining their first job offer, at salaries of $40,000 for the 9-on-a-scale-of-10 city, and $60,000 for the less-than-ideal city; the other half were to imagine they were well established in their career, deciding between $110,000 and $130,000.
Final result? People are far more likely to stick with their current city when presented with the decision between the two larger sums of money. Why? Relatively, the jump from $40K to $60K is a 150% increase in salary, while the 'established career' decision only yields an increase of less than 20%. Although the difference in salary is objectively the same ($20,000 should be worth $20,000 no matter what, right?), the responses illustrate just how seriously we take relativity.
What I like most about these kinds of experiments is that they can be clearly likened to the 'irrationality as cognitive illusion' metaphor, bridging the gap between cognitive and visual illusion. Just looking at the graphic representation of the results above you can see it works in the exact same way as the 'which table is longer?' illusion Ariely touches on briefly.
Certainly there are a lot of other factors that naturally influence a person's decision here (both consciously and unconsciously) but really that's kind of the point. Salary and location are the only objective factors on which to support 'rationality' in this scenario; when it comes down to it, we're absurdly horrible at being objective and rational, despite how strongly we might think the opposite.
