The Real Value of $10.00
To illustrate the power of context in people’s assessment of value, consider this question: Would you drive ten minutes out of your way to save $10 on a $25 blanket?
Now consider this question: Would you drive ten minutes out of your way to save $10 on a $125 jacket?
If you’re like many people, you’d be more willing to drive to save the $10 in the first example than in the second. Why? Isn’t $10 worth $10? Why does the value judgment seem to change depending on the situation?
Because people determine the value of the savings relative to the cost of the item, $10 seems to be worth a lot more in comparison to $25 than to $125. People evaluate choices in relative rather than in absolute terms.
Relativity in Decision Making
Essentially, the concept of relativity in decision making says:
- People assign value to things by comparing one thing to another. People do not possess an innate value meter that determines absolute value.
- People are constantly comparing and contrasting physical things, people, experiences, and ephemeral things such as emotions, attitudes, and points of view.
If people’s preferences were well defined, the contexts in which they make decisions would not affect their decision outcomes—that is, how many options are available or what options are available would not affect their decisions. But research shows that decision outcomes are very dependent on these things.
The Effect of Comparison on Evaluation
Because people have no innate means of determining the value of something, whether they evaluate something by itself or in comparison to something else often impacts their preferences and decision outcomes.
Researchers conducted a study in which they asked a group of people how much they would be willing to pay for a 20,000-entry dictionary with a torn cover. They asked another group how much they would pay for a 10,000-entry dictionary with a cover that was intact. Table 1 shows the results.
| Dictionary | Description | Price Willing to Pay |
|---|---|---|
A |
20,000 entries with a torn cover |
$20 |
B |
10,000 entries with an intact cover |
$24 |
Then, they asked a third group of people to evaluate the two dictionaries side by side and determine how much they would be willing to pay for each of them. Table 2 shows the results.
| Dictionary | Description | Price Willing to Pay |
|---|---|---|
A |
20,000 entries with a torn cover |
$27 |
B |
10,000 entries with an intact cover |
$19 |
As you can see, people valued the dictionaries very differently, depending on whether they considered them in isolation or by comparing them side by side. When a person evaluates a dictionary in isolation, it is difficult to determine what makes a good dictionary. How many entries does a good dictionary have? But a torn cover is easy to evaluate: it means the dictionary is defective and, consequently, of less value.
However, when people considered the two dictionaries side by side, it was easy for them to determine which one was the better of the two. Clearly, a dictionary with 20,000 entries is superior to one with only 10,000 entries. The process of comparison makes evaluation easy and draws attention to the more important attributes under consideration—in this case, the number of entries in the two dictionaries. [1]
