We find this situation pretty much every time we go to the vegetable market (anywhere in India). But in reality its not just rich people who behave irrationally, it’s everyone. Two stalwarts of behavioural economics – Daniel Kahneman and Amos Tversky – explain such behaviour with the help of the following example in their paper “The framing of decisions and the psychology of choice” published in Science in 1981.
Suppose you have two errands to run today – to buy a new pen and a suit for work. At a stationary store, you find a nice pen for Rs. 250 (in the original paper the amounts are different and in $). You are set to buy it when you are told that the same pen is for sale for Rs. 150 at another store 10 minutes away. What would you do? Would you take the trip to save Rs. 100? Most people faced with this dilemma say they would take the trip to save Rs.100.
Now you are shopping for your suit. You find a luxurious gray pinstripe suit for say Rs. 5000. You are about to buy it when another customer tells you that the exact same suit is for sale for Rs. 4900 at another store 10 minutes away. Would you make the 10-minute trip? Most people say they would not.
What’s going on here? Is 10 minutes of your time worth Rs. 100 or not? Whether the amount from which this Rs. 100 will be saved should be irrelevant. But in comes the problem of relativity.
We make comparisons which are easy and available locally. We compare a cheap pen with an expensive one and this contrast makes it obvious to us that we should spend that extra time to save Rs. 100. At the same time, the relative advantage of the cheaper suit is very small, so we spend the extra Rs. 100.
Says Dan Ariely, “This is why it is so easy for a person to add $200 to a $5000 catering bill for a soup entrée, when the same person will clip coupons to save 25 cents on a one dollar can of soup. Or a person will find it easy to spend $3000 to upgrade to leather seats when he/she buys a new $25000 car, but finds it difficult to spend it on a leather sofa.”
Now if we can think broadly about which transactions could help us save a lot, and how else we could use that saved money we’ll be using our money and time better. As far as vegetable vendors are concerned, that money you saved by bargaining is relatively a lot for them.