Relativity Trap

What Is a Relativity Trap?

A relativity trap is a psychological or behavioral bias that leads people to make irrational purchases. It is one form of the anchoring effect. People make comparisons in a relative way and find it difficult to compare across different categories. Savvy marketers frequently seek to exploit this, coaxing consumers into pursuing a spending decision that maximizes their profit. Behavioral economists have argued that this leads consumers to make purchases that are not necessarily in line with their true preferences. 

Understanding Relativity Traps

People make buying decisions based on comparisons. When we need to purchase a specific item, we tend to look at how much each shop charges to determine which is offering the best deal. Behavioral economists claim that sometimes this approach can lead us to think irrationally and make bad decisions.

Customers often do not know the actual market price or seller cost of the product or service they wish to purchase and instead rely on the prices listed by a shop or suggested by a salesperson.

The concept of a relativity trap is an example of the anchoring effect, a cognitive bias that describes when an individual relies on or fixates on an initially available piece of data or information in the decision-making process. Often, the first number we see clouds our perception of everything that comes after. Anchoring is often employed by retailers to fool consumers into believing that they are getting a good deal, the so-called "anchoring trap." In a relativity trap, people may make a decision based on values or prices relative to some arbitrary anchor. When experimenters rephrase the question in absolute terms or relative to a different anchor, the experimental subject's decision may appear to be irrational.

Numerous experiments have been conducted to argue that the relativity trap is a potent issue that affects economic and financial decisions for a great number of people. Following the original theory and early research, these experiments generally assume that money has a kind of absolute, intrinsic value and the people do or should make decisions based on these absolute values, devoid of the social context, personal relationships, uncertainties, and subjective values involved in real-world human decision-making.

Because of these complicating factors, it is not clear that relativity traps truly occur outside of controlled experiments. In real-world decisions, people usually have limited information, adjust for the degree of trust and confidence they place in trading partners, and consider the social context of repeated dealings with retailers and others in the economy, all of which can create situations which only appear to be relatively traps. Even in controlled experiments, it may be likely that the people who participate as experimental subjects are unable to leave their lifetime of experience with real-world transactions behind at the door and that the experimental results that claim to demonstrate relatively traps actually reflect these other real-world complications.

Examples of a Relativity Trap

Examples of relativity traps in real-world transactions usually depend on a dishonest merchant taking advantage of the limits information available to consumers, or in some cases deliberately lying of concealing information, rather than any actual cognitive bias on the part of the consumer.

A common example of the relativity trap is the pricing models adopted by most clothing stores. If the regular price of a pair of jeans is $40, the store will show the price as $100 but subsequently discount them by 50% so that the "sale" price is now $50. The buyer thinks they are getting a bargain when in reality the store has charged them an extra 25% on the item (the $10 difference). 

Even if the buyer’s true underlying preference is for a pair of jeans at no more than $40, they may still purchase the jeans at $50 because of the perception that they are actually saving money because of the sale price. 

For another example, commuters may pay $25 for an hour of “discount” parking, even though $20 parking may be available elsewhere (unknown to the commuter). If the same owner owns both lots, they may even deliberately follow this pricing strategy in order to capture some consumer surplus through effective price discrimination. 

A similar example comes from food service. Suppose a restaurant offers a value burger for $1.99, a regular burger for $2.99, and a premium burger for $4.59. The relativity trap suggests that most people will opt for the regular burger, perceiving it to be the best value or price relative to the quality of the burger.

The consumer may assume that the value burger is inferior because of its low price and that for “just a dollar more” they can enjoy a higher quality burger. On the other hand, they may think that the premium burger is not worth its elevated price because of how it compares to the other offerings, at almost double the cost of the regular burger.

However, if the price of the premium burger is slashed to $3.59, a substantial number of people will choose it on the grounds that it is worth paying an extra 60 cents for a premium burger. If the additional benefit that the consumer receives from the enhanced quality of the premium burger is worth less than 60 cents, then this is the relativity trap at work again.

Value Trap

The relativity trap is sometimes mentioned as a common pitfall in investing, too. Certain valuation multiples may make a company look like a bargain compared to its peer group. In reality, this just might be an illusion — the companies may be vastly different; its price compared to a historical precedent may not account for changes in the marketplace or the multiple may fail to factor in something important, such as the precarious state of its balance sheet. ONce again, rather than a true cognitive bias, this example depends on the limited information revealed or deliberately misrepresented to the investor. In investment circles, these relativity traps are known as "value traps."

Special Considerations

A famous example of a relatively trap comes from the book Predictably Irrational by Daniel Ariely based on experiments conducted by Amos Tversky and Daniel Kahneman. In this example, people are given a two hypothetical choices regarding the purchase of a pen and a suit. The pen costs $16 and the suit costs $500 at a near by store. At a store 15 minutes away, an identical pen costs $1 and an identical suit costs $485. Importantly, in this, and similar, experiments the subjects are expected not to consider any other information not given by the experimenters in making their choice.

Subjects in the experiment are first asked where they would choose to buy the pen and then where they would buy the suit. In the experimental results, most subjects choose to buy the pen at the second store for $1 and the suit at the first store for $485. Because both choices involve an identical trade off between saving $15 and saving the 15 minutes of travel time, but subjects' choices are opposite for the pen and the suit, the researchers conclude that the subjects choose irrationally based on the savings relative to the absolute price due to some cognitive bias.

However, when people make similar choices in the real world, they often justify their choice in terms of additional information, uncertainties, and social considerations that can not be controlled for in the experiment.

For example, they might not trust that the advertised price for the second suit will be accurate, that it might be a bait-and-switch trick. They might perceive that the markup on the first pen is unfair and seek to punish the high-priced pen seller. They might expect that the second suit might sell out before they can get to the second store, since haberdashers typically carry much lower inventories than pen sellers. Or, they might view paying full price for the suit as a better avenue for seeking social status through conspicuous consumption.

These buying habits, gained through years of experience with actual market transactions, mean that real-world examples that are held up as realtivley traps could likely reflect likely reflect some of these other factors, or others, rather than example sof true cognitive bias. More over, it is likely that deeply ingrained consumer habits carry over to the imaginary choices that experimental subjects make as well, so it is not entirely clear that relativity traps even truly exist in a controlled experimental settings.

What is a relatively trap in simple terms?

A relatively trap is when someone considers a relative difference in prices, when a different comparison might lead instead them to a better decision.

When do relativity traps happen?

Relatively traps happen in controlled experimental settings, where subjects are given specific information about a choice and instructed not to consider any information other than what the experimenter give them. Experimenters claim that the subjects choices reflect cognitive bias when they do not make the predetermined optimal choice in the experiment. Relatively traps are difficult or maybe impossible to find in real-world settings outside of experimental findings.

Are relativity traps related to special or general relativity?

No. Special and general relativity are theories in physics regarding the structure of time and space relative to an observer. Relativity traps are a concept in behavioral psychology and economics, which are entirely unrelated to physics.