RON WILCOX: As I drove
home from work one day,
I reminded myself that my
wife had an appointment
to get her hair cut.
It would be good, I thought,
to make a positive comment
when I walk in the door.
When I walked in, I
looked at her hair
and had absolutely no idea
whether or not she had it cut.
Should I risk making
a positive comment,
only to learn that her
appointment had been canceled,
and be exposed for the
well-intentioned fake
that I am?
I didn't want to do that,
so I remained silent
and later found out that
she did get her hair cut,
and I didn't notice.
It turns out that my
lack of perception
is rooted in some
basic psychology that
also occurs when we
consider the prices we
see when we go shopping.
If you see a friend who
normally wears their hair long
and they got a couple of inches
cut off, you may not notice.
If you see another friend
who wears their hair short
and they got a couple
of inches cut off,
you will certainly
notice right away.
Similarly, if you see a sale
for $1 off on a box of cereal,
that might seem
like a good deal--
a purchase worth making given
the amount of money saved.
But if you happen to see a sale
for $1 off on a nice shirt,
you'd probably laugh at it.
It would seem almost trivial.
We tend to experience many
changes in life this way.
Changes seem big or small
depending on how big or small
the current situation is.
However, the dollar
you're saving
is the same dollar
whether you save it
on a box of cereal or a shirt.
It just seems different
in the context
of different sized purchases.
The famous
psychologist Max Weber
studied this kind
of effect and found
that it was true in a
lot of situations, which
leads to some important
behavioral phenomena
that we all need
to watch out for.
When we spend a lot of
money, it is very easy
to spend even more.
When you buy a car
for perhaps $20,000,
you will be offered
add-ons-- things
that you might purchase to make
the car a little bit nicer.
On any other day, paying
$150 for a leather
wrapped steering wheel might
seem completely ridiculous,
but not today.
Today you just spent $20,000.
What's $150 more?
Formally, this effect is
known as the Weber-Fechner Law
of Pricing.
It simply means that
we tend to view prices
not in absolute terms, but
relative to other prices
we are thinking
about at that moment.
Let's do some very
quick math to help
us understand the
Weber-Fechner Law of Pricing.
Let's call the price we are
currently thinking about p.
It may be the price of a
car, a shirt, whatever.
We will only pay attention
to a change in the price
we are considering if it is
greater than some proportion.
Let's call that k.
So the change in p divided by p
has to be greater than k for us
to notice.
Now that doesn't mean
we're all the same.
Some people have really big
k's and others, very small.
The big k people don't notice
relative price differences
until they get really big, like
50% off or something like that.
The small k people are
the real price shoppers.
If they see even a small
relative price change,
they will notice it.
But whether you are a big k
person or a small k person,
the Weber-Fechner
Law still holds.
You will tend to pay
attention to price changes
only if the change
seems big enough
relative to the price you were
thinking about at the moment.
This means that whenever you
are spending a lot of money,
you should be extra careful
about upgrades, add-ons,
extended warranties, any of the
kind of extras that might tempt
you to spend a little more.
Because in that moment you
are considering big prices.
And these extra costs, by
comparison, may seem small.
But those extra dollars
you are spending
are the same dollars that
might seem important when
you are considering
smaller purchases,
like that box of cereal that
you buy on a regular basis.
If you understand the
Weber-Fechner Law of Pricing,
more of your money might
stay in your wallet.
