What Is a Relativity Trap?
A relativity trap is a psychological or behavioral trap that leads people to make irrational purchases. The human brain works in a relative way when making comparisons and finds it difficult to compare across different categories. Savvy marketers frequently seek to exploit this, coaxing consumers into pursuing a spending decision that maximizes their profit.
- A relativity trap is a psychological or behavioral trap that leads people to make irrational purchases.
- The human brain works in a relative way when making comparisons and finds it difficult to compare across different categories.
- A relativity trap is related to anchoring, a cognitive bias that describes when an individual relies on or fixates on an initial piece of information to make decisions.
Understanding a Relativity Trap
Our minds are generally programmed to make buying decisions based on comparisons. When we need to purchase a specific item, we tend to look at how much each shop charges to determine who is offering the best deal. Sometimes this approach can lead us to think irrationally and make bad decisions.
Customers typically do not know the actual real value of the product or service they wish to purchase and instead rely on the prices listed by a shop or suggested by a salesperson.
The concept of a relativity trap is related to the phenomenon of "anchoring," a cognitive bias that describes when an individual relies on or fixates on an initial piece of data or information in the decision-making process. Often, the first number we see clouds our perception of everything that comes after. That inevitably means that we will likely pay $25 for an hour of parking, if the first lot we came across charged $30.
Anchoring is often employed by retailers to fool consumers into believing that they are getting a good deal, the so-called "anchoring trap." Innumerable experiments on this subject find that the relativity trap is a potent issue that affects financial decisions for a great number of people.
Examples of a Relativity Trap
A restaurant offers a value burger for $1.99, a regular burger for $2.99, and a premium burger for $4.59. The relativity trap will ensure that most people opt for the regular burger, perceiving it to be the best value.
The consumer may assume that the value burger is inferior because of if its low price and that the premium burger is not worth its elevated price because of how it compares to the other offerings. 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 $100 but subsequently discount them by 50 % so that the "sale" price is now $50. The buyer thinks they are getting a bargain when in reality the store has earned an extra 25% on the item (the $10 difference).
The relativity trap is a common pitfall in investing, too. Certain valuation multiples may make a company look like a bargain compared to its peer group. In reality, this just might be an illusion—the companies may be vastly different, its price compared to a historical precedent may not account for changes in the marketplace or the multiple may fail to factor in something important, such as the precarious state of its balance sheet. In investment circles, these relativity traps are known as "value traps."
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 or she is also looking casually for a set of golf clubs to replace an old set, albeit less urgently.
While shopping for the bike, the buyer 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. Suddenly, the consumer has gone $50 over budget and failed to purchase the one thing he or she required the most—the bike.