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I was recently at the record store thinking "I dunno, $10 is a bit much for this. $7...I'd probably buy it. But not for $10."

That would be contrasted with a recent house we purchase where I'm sure I probably over paid by $10k or so.

But it's that first purchasing experience that causes me much more stress than the latter.

I've asked others and it seem to be a common cognitive puzzle. A good example seems to be phones...people tend to spend a few hundred extra dollars for the better phone, but will tend to hem and haw before spending $5 on an app for said phone.

Is there a term for this?

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    I believe there is some research on people focusing on relative costs rather than absolute costs. In other words, you will pay attention to a difference of $3 out of $10 because that's 30%, but not a difference of $10k out of a $200k house purchase because that's only 5%. However, I'm not aware of any term per se for this; it's just a tendency to view costs and benefits in relative/proportional terms rather than absolute terms. – BrenBarn Jan 17 '16 at 2:26
  • I don't know of a term for the OP's scenario that's particular to finance, but it's an instance of the general phenomenon of missing the forest for the trees. – ETD Jan 17 '16 at 2:31
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    Penny wise, pound foolish. – gaefan Jan 17 '16 at 5:16
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It's called Parkinson's law of triviality. From the Wikipedia entry:

Parkinson's law of triviality, also known as bikeshedding, bike-shed effect, and the bicycle-shed example, is [the] 1957 argument that organisations give disproportionate weight to trivial issues.

Also:

The time spent on any item of the agenda will be in inverse proportion to the sum [of money] involved.

Admittedly, this "law" applies to organisations rather than individuals, but it appears to fit the question.

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In behavioral economics, this is called the price elasticity of demand. Marketing professionals study this, too.

It's not just the price level that makes you think twice, but the good or service you're buying, and where.

To stick with the $7 vs $10 example, that is about the price of both a 6pack of beer, as well as a single beer at a sporting venue. If my local store tried to sell me a single bottle for $7, I would not be impressed... and not buy! But I fork it over at a sports game.

I am also reluctant to buy a 6pack of beer for $10 that i know i can usually buy for $7. That it registers on my "should i do this?" radar is evidence of my sensitivity to price. Whether i will still buy or not is a function of just how sensitive I am for that thing at that place and time.

On the point of houses, the same person will tend to be less sensitive (more elastic) for a true need like a house than for a discretionary purchase like beer. Partly that has to do with how we pay for houses and that the extra $10G will be felt in incremental monthly amounts.

There is quite a lot if interesting research out there though: price elasticity of demand.

  • The question is specifically asking about the relationship of price discrimination to the magnitude of the price. It is true that price elasticity of demand varies with how necessary the item is, but that in itself doesn't have any necessary connection with the magnitude of the price. – BrenBarn Jan 17 '16 at 7:45
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This is the difference between shopping for a "big-ticket" item and a "small-ticket", "consumable", or "repeat purchase" item.

When you shop for a large dollar-value item, you are usually shopping for one of them. The time you spend making decisions on it is amortized over just one item (with possible benefits if you need to trade it in or sell it later). You may even have a budget for shopping advice. For example, I live in a county where the median home price is $ 500,000. In this county, a typical home purchase includes $ 15,000 of shopping assistance for the buyer, $ 15,000 of selling assistance for the seller, $ 9,000 of transaction taxes, and thousands of dollars of inspections and appraisals. Spending an extra $ 10,000 to get the "right" house can be rationalized.

When you shop for a small dollar-value item, you are usually either purchasing it as part of an ongoing stream of purchases, or you are considering starting such a stream of purchases. A record per week is several hundred dollars per year -- enough to pay the incremental mortgage on that extra $ 10,000 you paid for your house. Also, if you notice that a store has poor bargains, you can look for a different store -- this can save you a lot of money in the long run.

Also, you are asking, "Do I really want this item? Is it worth making space to store it (perhaps by getting rid of something else)?" If a typical "good" record is $10 - $15, and you don't think this record even worth $7, then this record might be the one you get rid of to store the next "good" one you find. Thus, you might only get a single playing's pleasure from this one -- so it might not even be worth $ 2 to you, after you consider your constraints. Instead of wasting your money on things that aren't worth keeping (and feeling guilty about throwing them out, or feeling guilty about keeping them around), you can spend your money on "the good stuff".

Notice that investors who purchase homes to rent out act more like repeat purchasers. They often have very clear ideas of what price will "pencil out", and may have business rules of not going above that price.

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