What is a Relativity Trap
A relativity trap is 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
The concept of a relativity trap is related to the phenomenon of "anchoring," which is a cognitive bias that described when an individual relies on or fixates on an initial piece of data or information in the decision making process. Anchoring is often employed by retailers to fool consumers into believing that they are getting a good deal, the so-called "anchoring trap."
Relativity Trap Examples
An example of a relativity or anchoring trap may be seen in this scenario: A restaurant offers a value burger for $1.99, its regular burger (also its most profitable) for $2.99, and its 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 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 the reality is that the store has earned an extra 25% on the item (the $10 difference).
Relativity Trap and Comparisons
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 they are also looking casually for a set of golf clubs to replace an old set, although the bike is a more pressing necessity. 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, even though the bike was required more urgently and they went $50 over budget.
The relativity trap may be seen in investing, where a company's stock may be seen as cheap as compared to those of peer companies. In reality, the companies may be vastly different or its price compared to a historical precedent may not account for changes in the marketplace. Such a relativity trap is known as a "value trap."