Comparing minds

(featured image: qimono)

A relativity principle possibly even more fundamental than Albert Einstein’s

A little while ago I sat working with the radio tuned to a show in which the hostess quizzes a celebrity for a couple of hours on the big things in their life: love, money, work, death. I was only half paying attention, but all of a sudden my interest was piqued, and I stopped doing what I was doing. The guest was saying that you can be happier when your car is completely wrecked and written off, than when it has just a few cosmetic scratches and a €1000 (£900) repair bill.

His explanation went like this. When you have a minor collision, the damage, and certainly the amount of money you’ll need to fork out to get the dent undented or the scratches unscratched seem disproportionate. Not just disproportionate compared to the actual severity of the bump, but there’s also the feeling that it was all just really bad coincidence, a millisecond of inattention, a moment of distraction. The price to pay for an event that, in any alternative universe, would never have happened, is way too high.

Good luck and bad luck

When you walk away with nothing worse than a bruised elbow after an almighty crash that reduces your vehicle to a bunch of tangled metal, however, you praise yourself lucky that the damage is just stuff. And this time the alternate universe that was just a millisecond away could have meant death, or worse.

In short: with the small accident, you were unlucky, but with the serious one, you were lucky.

The show’s guest is, to the best of my knowledge, not a behavioural economist, but he did twig an important behavioural economics observation: often the value we perceive in something depends greatly on how it is framed. It depends on what you compare it with.

As is the case for so many behavioural economics insights, this one too goes back to before even the first mention of the term. In 1890, philosopher and psychologist William James wrote (in The Principles of Psychology):

williamjames4

Image: based on Wikimedia

So we have the paradox of a man shamed to death because he is only the second pugilist or the second oarsman in the world. That he is able to beat the whole population of the globe minus one is nothing; he has pitted himself to beat that one; and as long as he doesn’t that nothing else counts.

One century later, psychologists Victoria Medvec, Scott Madey and Tom Gilovich looked at the emotional reactions of silver and bronze medal winners at the 1992 Summer Olympic Games in Barcelona. Both immediately after their performance, and subsequently when they are handed the medal, the silver medalists were rated as significantly less happy than the athletes who won bronze. Strange, isn’t it?

The researchers explain this through the counterfactual thinking of the persons concerned. The silver winner’s prominent counterfactual is the gold medal – a mere step away. Sure, the bronze medal is also just a step away, but that difference is a bit meh. It doesn’t feel like silver is so much more valuable: both silver and bronze are non-winners, and both still merit a place on the medal podium. For the bronze winner, in contrast, the defining counterfactual is not making the medal stand at all. The difference between third place and fourth place is huge.

This is very similar to the hapless driver, whose counterfactual in the one case is no accident at all, making the damage look very large, and in the other case being dead or severely injured, which makes mere material damage look insignificant.

Grounds for comparison

This kind of phenomenon arises even when it doesn’t involve loss (or not winning the big prize). A few days ago my daughter mentioned she was going to see the Royal Opera House ballet performance of Alice’s Adventures in Wonderland. Only, it wasn’t actually at the London Royal Opera House: it turned out to be a live satellite streaming event in a local cinema.

Tickets for the live performance in London were priced between £25 and £165. The cinema ticket cost £15.45, so even compared with the cheapest seat for the real thing (unlikely to be the best one in the house) that feels like a bargain. But the cinema’s other screens show ordinary movies, and then the cost of the Alice ballet is 50% higher than that of, say, Blade Runner. Not quite such a bargain, if that is the basis on which you make the comparison.

nespresso

Cheap or dear? You choose. (image: zeeh)

Small wonder clever marketers make use of how we make comparisons too. In Wiki Man, advertising executive Rory Sutherland explains how Nestlé succeeds in making consumers pay 31p for a cup of coffee they make themselves. A coffee made with the recommended 1.8g of Nescafé from a 200g jar priced at £5 would cost about 4.5p. If you were to buy your Nespresso pods from a similar jar, you’d pay an eye watering £33. Evidently, no one in their right mind would even contemplate that.

But of course they don’t make you compare their pods with (their own!) instant coffee. Instead they ensure the counterfactual is the £2.20 you pay for an Americano at Starbucks. And now your 31p coffee is a bargain for sure – making even the most expensive Nespresso machine (at over £400) pay for itself after just 200 cups. And the more you drink, the more you save!

Our minds are built to compare – or better, we evolved to be the successful species we are thanks to our mind’s ability to compare things.

But we should remember that our conclusions depend a lot on what we compare things with. Everything is relative. And as long as we’re well aware of that, we can truly benefit from our comparing mind.

 

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About koenfucius

Wisdom or koenfusion? Maybe the difference is not that big.
This entry was posted in Behavioural economics, Cognitive biases and fallacies, Economics, Emotions and tagged . Bookmark the permalink.

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