DEFINITION of 'Relativity Trap'
A psychological or behavioral trap that leads people to make irrational choices when making spending decisions. The relativity trap is frequently exploited by savvy marketers to coax consumers into making a spending decision that maximizes their profit. It arises because the human brain works in a relative way while making comparisons and finds it difficult to compare across different categories. Innumerable experiments on this subject find that the relativity trap is a potent issue that affects financial decisions for a great number of people.
BREAKING DOWN 'Relativity Trap'
For example, a restaurant may offer a value burger for $1.99, its regular burger (also its most profitable) for $2.99, and its premium burger for $4.59. In this scenario, the relativity trap will ensure that most people opt for the regular burger.
However, if the price of the premium burger is slashed to $3.59, a substantial number of people will choose it on the grounds that it is worth paying an extra 60 cents for a premium burger. This is the relativity trap at work again.
Another example of the relativity trap is the pricing models adopted by most clothing stores. If the regular price of a pair of jeans is $40, the store will show the price as $80 but subsequently discounted by 60%, so that the “sale” price is now $48. The buyer thinks she’s getting a bargain, when the reality is that the store generated an extra 20% on the item.
The relativity trap is also apparent when making comparisons across dissimilar groups. For example, consider a consumer who sets out to buy a basic bike on a limited budget of $150. Assume he is also looking casually for a set of golf clubs to replace his old set, although the bike is a more pressing necessity. While shopping for the bike, he comes across a great set of clubs that have been marked down 50% and are now priced at $200. The relativity trap may well lead the consumer to buy the golf clubs on the justification that it is an opportunity not to be missed, even though the bike was required more urgently and he went $50 over his budget.