The Psychology of Everyday Life: Motivation and the Search For Happiness

The Psychology of Money

How does our sensitivity to context affect our decision making?

People are not very good at evaluating the absolute value of an item. We tend to see value as relative. In other words, our estimation of the value of an object will vary tremendously depending on the situation. The economist Richard Thaler asked people if they would go twenty minutes out of their way to save five dollars on either a $15 calculator or a $125 leather jacket. Sixty-eight percent of people said yes for the calculator, but only 29 percent said yes for the leather jacket. Even though the amount of money was exactly the same, the five dollars seemed like it was worth more in the first condition, as it was a larger amount relative to the cost of the calculator. In the second condition, the five dollars seemed like it was worth less because it was smaller relative to the cost of the leather jacket.


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