# Name of example of irrationality of proportional and absolute cost

I am trying to give a puzzle from behavioral economics illustrating on the irrationality of thinking of costs in proportional rather than absolute terms. I remembered vaguely an example like this but could not find the exact term or if another more salient example exists:

You can buy a computer nearby for \$1k or 1 hour away for \$950. Most people think that \$50 is only 5% of the cost and so would not drive 1 hour away. You can buy a stereo system nearby for \$100 or 1 hour away for \$50. Most people think that \$50 is 50% of the price and so would drive 1 hour to get the cheaper item.

The problem is that it's the same 1 hour away and the same \$50. What is the name of this puzzle or irrationality? ## 1 Answer I think you're referring to the jacket-calculator problem, first proposed by Tversky and Kahneman (1981) as their Problem 10. The paper illustrates the idea of mental accounting with several problems regarding uncertainty, and problem 10 illustrates "the temporary devaluation of money": The following problem, based on examples by Savage and Thaler, further illustrates the effect of embedding an option in different accounts. Two versions of this problem were presented to different groups of subjects. One group ($$N = 93$$) was given the values that appear in parentheses, and the other group ($$N = 88$$) the values shown in brackets: Problem 10: Imagine that you are about to purchase a jacket for (\$125) [\$15] and a calculator for (\$15) [\$125]. The calculator salesman informs you that the calculator you wish to buy is on sale for (\$10) [\$120] at the other branch of the store, located 20 minutes drive away. Would you make the trip to the other store? The response to the two versions of problem 10 were markedly different: 68 percent of respondents were willing to make an extra trip to save \$5 on a \$15 calculator; only 29 percent were willing to exert the same effort when the price of the calculator was \$125. ... By the curvature of $$\nu$$, a discount of \\$5 has a greater impact when the price of the calculator is low than when it is high.

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Many readers will recognize the temporary devaluation of money which facilitates extra spending and reduces the significance of small discounts in the context of a large expenditure, such as buying a house or a car. This paradoxical variation in the value of money is incompatible with the standard analysis of consumer behavior.