I once had an argument with my wife.
It was over a can of Coke.
We were having ramen in Northpoint. My wife wanted to order Coke, but the restaurant was charging $3 a can.
Daylight robbery!
I wanted to get the Coke from a nearby ValuDollar. It would be $1 or less there.
That started the argument, because to be honest, it was only $2. Who cares?
The Mental Frame
When we look a $1 Coke and a $3 Coke, that’s a 200% markup.
Absolutely bonkers.
But if we zoom out and look at the absolute price, it’s only $2.
This is known as the mental frame. If we frame it as a percentage, it is huge. But when we frame it as an absolute number, it is nothing.
When does the mental frame change?
It changes with the situation.
For a broke university student, $2 might mean a lot.
For someone who is earning $2,000 a month, $2 every day can add up.
For someone who has $100,000 in net worth, $2 won’t move the needle.
For someone with one million dollars, $2 is a rounding error.
The situation will change depending on your own context.
What problems does the mental frame create?
We tend to ignore big numbers and focus on the small ones.
Dan Ariely gives an example of this in his book Predictably Irrational:
“We find it easy to spend $3,000 to upgrade to leather seats when we buy a new $25,000 car, but difficult to spend the same amount on a new leather sofa.”
When the car costs a lot, an additional $3,000 is nothing.
When the alternative is $0, $3000 is a lot.
We tend to focus on the percentage change, rather than the absolute number.
But this might result in thousands of dollars slipping away carelessly.
The Solution
We have to anchor our spending to some fixed value.
The next time you think about an add-on, consider how many cans of Coke that could be.
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