The Truth about Relativity
Thanks Deepak for sending me the book “Predictably Irrational” by DAN ARIELY ( Alfred P. Sloan Professor of Behavioral Economics at MIT). He tells us what influences our buying decisions. It may be true for many, at least its true for me….
We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another, and estimate value accordingly. (For instance, we don’t know how much a six-cylinder car is worth, but we can assume it’s more expensive than the four-cylinder model.)
Why Everything Is Relative—EvenWhen It Shouldn’t Be.
Consider this offer :
Welcome to ABC
Pick the type of subscription you want to buy or renew.
One-year subscription to abc.com,. Includes online access to all articles from Abc.com since 1997
subscription – Rs 2500.00
. One-year subscription to the print edition of Abc
• Print subscription – Rs5000.00
One-year subscription to the print edition of ABC and online access to all articles from ABC since 1997.
• Print & web subscription – Rs 5000.00
The first offer—seemed reasonable. The second option—seemed a bit expensive, but still reasonable.
But the third option: a print and Internet subscription for Rs 5000.Who would want to buy the print option
alone, when both the Internet and the print subscriptions were offered for the same price?
In the case of the ABC, we may not have known whether the Internet-only subscription at Rs 2400 was a better deal than the print-only option at Rs 5000. But we certainly know that the print and-Internet option for Rs 5000 was better than the print-only option at Rs 5000. In fact, you could reasonably deduce that in
the combination package, the Internet subscription is free!
I probably would have taken the package deal myself. (Later, when tested the offer on a
large number of participants, the vast majority preferred the Internet-and-print deal.
We don’t know what kind of speaker system we like—until we hear a set of speakers that sounds better than the previous one. We don’t even know what we want to do with our lives—until we find a relative or a friend who is doing just what we think we should be doing. Everything is relative, and that’s the
point. Like an airplane pilot landing in the dark, we want runway lights on either side of us, guiding us to the place where we can touch down our wheels.
Take the television salesman. He plays the same general type of trick on us when he decides which televisions to put together on display:
36-inch Panasonic for Rs 28000
42-inch Toshiba for Rs 36000
50-inch Philips for Rs 60000
Which one would you choose? In this case, he knows that customers find it difficult to compute the value of different options. (Who really knows if the Panasonic at Rs 28000 is a better deal than the Philips at Rs 60000?) But he also knows that given three choices, most people will take the middle choice (as in landing your plane between the runway lights).
So guess which television he prices as the middle option? That’s right—the one he wants to sell!
A restaurant consultant, who gets paid to work out the pricing for menus. One thing he has learned is that high-priced entrées on the menu boost revenue for the restaurant—even if no one buys them. Why? Because even though people generally won’t buy the most expensive dish on the menu, they will order the
second most expensive dish. Thus, by creating an expensive dish, a restaurateur can lure customers into ordering the second most expensive choice (which can be cleverly engineered to deliver a higher profit margin).1
This is not only irrational but predictably irrational as
well.. It’s this:
we not only tend to compare things with one another but
also tend to focus on comparing things that are easily
comparable—and avoid comparing things that cannot be
Rich envies the super rich
RELATIVITY HELPS US make decisions in life. But it can also
make us downright miserable. Why? Because jealousy and
envy spring from comparing our lot in life with that of others.
An employee complain’s about his salary.
“How long have you been with the firm?” the executive asked the young man.
“Three years. I came straight from college,” was the answer.
“And when you joined us, how much did you expect to be making in three years?”
“I was hoping to be making about a hundred thousand.”
The executive eyed him curiously.
“And now you are making almost three hundred thousand,
so how can you possibly complain?” he asked.
“Well,” the young man stammered, “it’s just that a couple of the guys at the desks next to me, they’re not any better than I am, and they are making three hundred ten.”
The executive shook his head.
An ironic aspect of this story is that in 1993, federal securities regulators forced companies, for the first time, to reveal details about the pay and perks of their top executives. The idea was that once pay was in the open, boards would be reluctant to give executives outrageous salaries and benefits.
This, it was hoped, would stop the rise in executive compensation, which neither regulation, legislation, nor shareholder pressure had been able to stop. And indeed, it needed to stop.
In 1976 the average CEO was paid 36 times as much as the average worker. By 1993, the average CEO was paid 131 times as much. But guess what happened. Once salaries became public information, the media regularly ran special stories ranking CEOs by pay. Rather than suppressing the executive perks,
the publicity had CEOs in America comparing their pay with that of everyone else. In response, executives’ salaries skyrocketed.
The trend was further “helped” by compensation consulting firms that advised their CEO clients to demand outrageous raises. The result? Now the average CEO makes about 369 times as much as the average worker—about three times the salary before executive compensation went public.
Few questions for the executive :
“What would happen, if the information in your salary database became known throughout the company?”
The executive ‘s answer, “we could get over a lot of things here—insider trading, financial scandals,
and the like—but if everyone knew everyone else’s salary, it would be a true catastrophe. All but the highest-paid individual would feel underpaid—and I wouldn’t be surprised if they went out and looked for another job.”
Isn’t this odd? It has been shown repeatedly that the link between amount of salary and happiness is not as strong as one would expect it to be (in fact, it is rather weak). Studies even find that countries with the “happiest” people are not among those with the highest personal income. Yet we keep
pushing toward a higher salary. Much of that can be blamed on sheer envy. As H. L. Mencken, the twentieth-century journalist, satirist, social critic, cynic, and freethinker noted, a man’s satisfaction with his salary depends on (are you ready for this?) whether he makes more than his wife’s sister’s husband.
Why the wife’s sister’s husband? Because (and I have a feeling that Mencken’s wife kept him fully informed of her sister’s husband’s salary) this is a comparison that is salient and readily available.*
All this extravagance in CEOs’ pay has had a damaging effect on society. Instead of causing shame, every new outrage in compensation encourages other CEOs to demand even more.
Why CEO, this I think is the scene across the industries at all levels.
CAN WE DO anything about this problem of relativity?
If we draw circle and surround it many large circles, the circle will look small. And again if surround it small circles this circle will appear large though they are of the same size.
The good news is that we can sometimes control the “circles”around us, moving toward smaller circles that boost our relative happiness. If we are at our class reunion, and there’s a “big circle” in the middle of the room with a drink in his hand, boasting of his big salary, we can consciously take several steps away and talk with someone else. If we are thinking of buying a new house, we can be selective about the open houses we go to, skipping the houses that are above our means. If we are thinking about buying a new car, we can focus on the models that we can afford, and so on.We can also change our focus from narrow to broad.