Relative Thinking Theory

28 Pages Posted: 11 Apr 2005

See all articles by Ofer H. Azar

Ofer H. Azar

Ben-Gurion University of the Negev - Guilford Glazer Faculty of Business and Management

Date Written: February 2005

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, percentages, ratios, absolute differences, Weber's law

JEL Classification: D10, M30, L10, C91, A12

Suggested Citation

Azar, Ofer H., Relative Thinking Theory (February 2005). Available at SSRN: https://ssrn.com/abstract=701581 or http://dx.doi.org/10.2139/ssrn.701581

Ofer H. Azar (Contact Author)

Ben-Gurion University of the Negev - Guilford Glazer Faculty of Business and Management ( email )

P.O. Box 653
Beer-Sheva, 84105
Israel
+972 8 6472675 (Phone)
+972 8 6477691 (Fax)

HOME PAGE: http://www.oferazar.com

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