I am like that, you ?

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

compared easily.

***********************************************************

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.

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Published by:

rajmenon

Grateful for the love and respect received so far. Inspire, motivate and enable anybody to achieve their limitless limits-that is my goal for the rest of my life. Cofounder KelpHR, kelphr.com

Categories Uncategorized4 Comments

4 thoughts on “I am like that, you ?”

  1. Interesting thoughts there sir! However I personally feel the common man who forms the vast majority of our middle class society would look at the first opportunity to make / save money. This is more so if the cost of the product / service appears even slightly on the higher side.
    Eg: If we are to purchase a speaker system as you mention in your blog for a middle class man he would be more interested in buying one which would serve his purpose most. i.e If i talk of a system which is 5K for a 800 watts speaker and 8.5K for 1600 watts speaker the person would surely jump in for the lesser one because rationale says at no point of time I would turn my volume to 1600 watts 🙂 !!. So why not opt for one which serves my need the best.

  2. We are Different!

    Our Western education has programmed us to believe that what ever emanates from the western research laboratories and centers are true. Most of the findings, reports are financed by business enterprises with the ultimate aim to enhance their revenue and profit. The profit thus generated is disproportionately shared between the majority share holders/owners, CEOs and other employees. There is a class of such persons who need to spend their income.

    Business enterprises try to grab this niche market by offering exotic products and services that matches their income. Once again, these business enterprises finance the research work to generate new and innovative products and services, identify the needs, the psychology of buying etc. Gradually, the business, owners, CEOs and general public become part of this vicious circle of trying to satisfy their needs initially and later on their desires.

    Everybody’s needs are very less but once aroused there is an never ending desire. “Bhog” (enjoyment) is like petrol. By pouring more and more petrol, one can not put off the fire but only burn fiercely. The more you enjoy the more you need. This is what our Indian culture has taught us. Therefore, an Indian brought in traditional families with ancient values (which is extremely rare, now) or learned from sacred text books works with out expectation of reward or huge salary. There are several IIT, IIM, engineering and medical students who abandoned their attractive jobs to become monks, revolutionaries, social activists etc.

    For us, it is a absolute truth that we are all “God’s children” and we love each other accordingly. We see “God” in every living and non-living things. We were taught (not by our western education) to consume less and only to the extent required. We were advised to renounce material and mental desires. These philosophies had limited us comparing with others. Thus, Indian values (still existing here and there fighting the western influence) have made us different and relativity would not affect us in ideal situation. If West is trying to become the richest relative to others, we are trying to become the largest givers relative to our own wish.

    Example: A women tailor (age around 55) donates Rs 4 lakhs (her life saving) to an Indian trust to supplement their effort spread our values and restore the Indian society to it’s old glory. There are well educated persons with good position in industries joining trust organizations to help people with out any expectation.

    We Compare In:
    “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 compared easily.” ……………

    Again, this kind of comparison takes place because of our western education, news, cinema etc. I do compare the prices between different models but my ultimate decision lies based on my minimal need rather than the relative cost benefit between the choices created to cheat us!

    Recently, I thought of buying a car for personal use as my old Maruti is 15 years old. I checked quite a few makes and models. When I started comparing out things like models, colleagues salaries and models of their car, I felt I must buy a good new car. However, I decided to get my old car painted and interior changed to make it fit for continued use. So, I compared what I have with additional needs and got it with minimum expense. The saving is not just money but energy to produce new car and pollution that would have occurred during production.

    Another case: I wanted to buy two Laptop computers for class room presentation. I had a budget of Rs 1,00,000. I checked different makes and models and finally decided “Netbook” PC. With it’s price, I could afford to buy four and still left with fund for some other use. No one wanted me to take the risk. The argument was since fund is available why not use better models. I was clear that class room presentation and general office package use, “netbook” is sufficient. After one month of use, people are visiting my department to see that and their use. It was the rock bottom model.

    “CAN WE DO anything about this problem of relativity?”

    Yes, it has started in India. Try to get the executive compensation figure of Rs 1000 Cr establishment “Patanjali Yog Peeth”, “Divya Yog Mandir (Trust)”, and many of its establishments coming up daily. We will be surprised to find there is a solution to relativity and it was in vogue in India for several centuries.

    Jai Hind

  3. There is also a matter of exercising choice. There is a recent book on that topic by a lady that makes some interesting observations. You might find that a good read. I just the review of it in the weekend’s deccan herald.

    1. Thanks for bringing it up. I read the excerpt of ‘The Art of Choosing: the decisions we make every day — what they say about us and how we can improve them’ by Sheena Iyengar.

      Regards,

      Rajendra Menon

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