It is human psychology of comparison, we value things depend on what we compare them with.
While reading the book Seeking wisdom from Darwin to Munger by Peter Bevelin i come to know many real life examples of this psychological effect.
Observe it - Fill one bucket with cold water, another with hot water, and a third with water at room temperature. Put one hand in the bucket of cold water and the other hand in the bucket of hot water. Then put both your hands in the bucket of room temperature water. What happens? You will feel that your cold hand feels warmer and that your warm hand feels colder.
For example, we evaluate stimuli like temperature, loudness, brightness, health, status, or prices based on their contrast or difference from a reference point (the prior or concurrent stimuli or what we have become used to). This reference point changes with new experiences and context. This means that how we value things depend on what we compare them with.
Sales people often try to sell the more costly item first. We are out buying a computer and some diskettes. In comparison to $1,500 computer, diskettes at $10 seem like a bargain. After we buy the big ticket items, the add-ons seem cheap in comparison.
Experiments have shown that we go across town to save $10 on a clock radio but not to save $10 on a large-screen TV. The difference between $100 and $110 seems like a larger saving than the difference between $2850 and $2860. But it's the same $10 saving.
A hotel has been renting rooms for $100 a night. The day after a hurricane, the hotel raises its prices to $150. Studies show that we consider this unfair. We determine what is fair or not in reference to what we have been used to. This means that policies that have habit-forming consequences may be hard to reverse if they are seen as a loss.
For example, studies show that a person of average attractiveness is seen as less attractive when compared to highly attractive others.
Charles Munger gives another example:
In one experiment, a group of people was asked to choose between $6 and an elegant pen. Most choose the cash. Another group of people was asked to choose between $6, the elegant pen, or an inferior pen. Most choose the elegant pen. By adding an inferior option, another option seemed more attractive.
One more example - Mary is looking at houses. The real estate broker knows that the house he is
trying to sell Mary is in poor shape and a bad area. He starts by showing Mary bad properties in an ugly neighborhood. Afterwards, he takes her to the house he wanted to sell all along. Suddenly this house and the area seem great in comparison to the other houses she saw.
Another example of contrast comparison is when we interview one job candidate after another.
In accounting ex-Satyam fraud
Contrasts may blind us to change until it's too late. For example, we often don't notice the bad behavior of others if it goes sour gradually over time.
Often we see reality as constant, although it gradually changes. A stimulus must reach an absolute threshold before we can detect it. Before we notice a change in a stimulus, a certain relative change most occur. If the change is slow enough, we don't notice the change. Our ability to detect and react to changes in a stimulus decreases as its magnitude increases. To a small stimulus, only a small
amount must be added. To a larger stimulus, a large amount must be added.
Warren Buffett says:
He continues:
So what is the solution of contrast comparison in our daily life, as peter Bevelin suggested-
While reading the book Seeking wisdom from Darwin to Munger by Peter Bevelin i come to know many real life examples of this psychological effect.
Observe it - Fill one bucket with cold water, another with hot water, and a third with water at room temperature. Put one hand in the bucket of cold water and the other hand in the bucket of hot water. Then put both your hands in the bucket of room temperature water. What happens? You will feel that your cold hand feels warmer and that your warm hand feels colder.
We judge stimuli by differences and changes and not absolute magnitudes.
For example, we evaluate stimuli like temperature, loudness, brightness, health, status, or prices based on their contrast or difference from a reference point (the prior or concurrent stimuli or what we have become used to). This reference point changes with new experiences and context. This means that how we value things depend on what we compare them with.
The order in which something is presented matters.
Sales people often try to sell the more costly item first. We are out buying a computer and some diskettes. In comparison to $1,500 computer, diskettes at $10 seem like a bargain. After we buy the big ticket items, the add-ons seem cheap in comparison.
Experiments have shown that we go across town to save $10 on a clock radio but not to save $10 on a large-screen TV. The difference between $100 and $110 seems like a larger saving than the difference between $2850 and $2860. But it's the same $10 saving.
A hotel has been renting rooms for $100 a night. The day after a hurricane, the hotel raises its prices to $150. Studies show that we consider this unfair. We determine what is fair or not in reference to what we have been used to. This means that policies that have habit-forming consequences may be hard to reverse if they are seen as a loss.
The same thing may appear attractive when compared to less attractive things and unattractive when compared to more attractive things.
For example, studies show that a person of average attractiveness is seen as less attractive when compared to highly attractive others.
Charles Munger gives another example:
"In my generation, when women lived at home until they got married, I saw some perfectly terrible marriages made by highly desirable women because they lived
in terrible homes. And I've seen some terrible second marriages which were made because they were slight improvements over an even worse first marriage."
In one experiment, a group of people was asked to choose between $6 and an elegant pen. Most choose the cash. Another group of people was asked to choose between $6, the elegant pen, or an inferior pen. Most choose the elegant pen. By adding an inferior option, another option seemed more attractive.
One more example - Mary is looking at houses. The real estate broker knows that the house he is
trying to sell Mary is in poor shape and a bad area. He starts by showing Mary bad properties in an ugly neighborhood. Afterwards, he takes her to the house he wanted to sell all along. Suddenly this house and the area seem great in comparison to the other houses she saw.
Another example of contrast comparison is when we interview one job candidate after another.
In accounting ex-Satyam fraud
"If we slowly and gradually over time manipulate the numbers, the auditors won't
notice it."
Often we see reality as constant, although it gradually changes. A stimulus must reach an absolute threshold before we can detect it. Before we notice a change in a stimulus, a certain relative change most occur. If the change is slow enough, we don't notice the change. Our ability to detect and react to changes in a stimulus decreases as its magnitude increases. To a small stimulus, only a small
amount must be added. To a larger stimulus, a large amount must be added.
Sometimes it is the small, gradual, invisible changes that harm us the most.
"One of the problems in society is that the most important issues are often these incremental type things."
He continues:
The world is not going to come to an end because tomorrow there are 200 or 250 thousand
more people on the planet than there were today. That's about the number it grows every
day ... it is like eating about 300 calories more each day than you burn up; it has no effect on
you today. You don't get up from the table and all of a sudden everybody says, "My God, you
look fat compared to when you sat down!" But, if you keep doing it over time, the
incremental problems are hard to attack because that one extra piece of pie doesn't really seem
to make a difference. The 250,000 people tomorrow don't seem to make any difference, but the cumulative effects of them will make a huge difference over time, just like overeating will
make a huge difference over time. The time to attack those problems is early.
So what is the solution of contrast comparison in our daily life, as peter Bevelin suggested-
"Evaluate people and objects by themselves and not by their contrast."
Disclosure- This entire article is taken from the book Seeking wisdom from Darwin to Munger by Peter Bevelin, so all the wisdom credit goes to Peter Bevelin. I am just using his wisdom and posting this post here, so other can also get benefited from Peter Bevelin wisdom and i strongly recommend to read his books.
Thanks,
Mahesh
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