A Model of Relative Thinking
Benjamin Bushong
Harvard
Matthew Rabin
Harvard
Joshua Schwartzstein
Dartmouth
May 15, 2015

Abstract
Fixed differences look smaller when compared to large differences. This basic fact means
that choice sets distort a person’s preferences. We propose a model of relative thinking where
a person weighs a given change along a consumption dimension by less when it is compared
to larger changes along that dimension. In deterministic settings, the model predicts context
effects such as the attraction effect, but predicts meaningful bounds on such effects driven by
the intrinsic utility for the choices. In risky environments, a person is less likely to exert effort
in a money-earning activity if he had expected to earn higher returns or if there is greater income
uncertainty. In a variant of the model, relative thinking induces a tendency to overspend,
and for a person to act more impatient if infrequently allotted large amounts to consume than
if frequently allotted a small amount to consume.
Keywords: relative thinking; JEL Classification: B49