I reminded myself that my wife had an appointment

to get her hair cut.

It would be good, I thought, to make a positive comment

when I walk in the door.

When I walked in, I looked at her hair

and had absolutely no idea whether or not she had it cut.

Should I risk making a positive comment,

only to learn that her appointment had been canceled,

and be exposed for the well-intentioned fake

that I am?

I didn't want to do that, so I remained silent

and later found out that she did get her hair cut,

and I didn't notice.

It turns out that my lack of perception

is rooted in some basic psychology that

also occurs when we consider the prices we

see when we go shopping.

If you see a friend who normally wears their hair long

and they got a couple of inches cut off, you may not notice.

If you see another friend who wears their hair short

and they got a couple of inches cut off,

you will certainly notice right away.

Similarly, if you see a sale for $1 off on a box of cereal,

that might seem like a good deal--

a purchase worth making given the amount of money saved.

But if you happen to see a sale for $1 off on a nice shirt,

you'd probably laugh at it.

It would seem almost trivial.

We tend to experience many changes in life this way.

Changes seem big or small depending on how big or small

the current situation is.

However, the dollar you're saving

is the same dollar whether you save it

on a box of cereal or a shirt.

It just seems different in the context

of different sized purchases.

The famous psychologist Max Weber

studied this kind of effect and found

that it was true in a lot of situations, which

leads to some important behavioral phenomena

that we all need to watch out for.

When we spend a lot of money, it is very easy

to spend even more.

When you buy a car for perhaps $20,000,

you will be offered add-ons-- things

that you might purchase to make the car a little bit nicer.

On any other day, paying $150 for a leather

wrapped steering wheel might seem completely ridiculous,

but not today.

Today you just spent $20,000.

What's $150 more?

Formally, this effect is known as the Weber-Fechner Law

of Pricing.

It simply means that we tend to view prices

not in absolute terms, but relative to other prices

we are thinking about at that moment.

Let's do some very quick math to help

us understand the Weber-Fechner Law of Pricing.

Let's call the price we are currently thinking about p.

It may be the price of a car, a shirt, whatever.

We will only pay attention to a change in the price

we are considering if it is greater than some proportion.

Let's call that k.

So the change in p divided by p has to be greater than k for us

to notice.

Now that doesn't mean we're all the same.

Some people have really big k's and others, very small.

The big k people don't notice relative price differences

until they get really big, like 50% off or something like that.

The small k people are the real price shoppers.

If they see even a small relative price change,

they will notice it.

But whether you are a big k person or a small k person,

the Weber-Fechner Law still holds.

You will tend to pay attention to price changes

only if the change seems big enough

relative to the price you were thinking about at the moment.

This means that whenever you are spending a lot of money,

you should be extra careful about upgrades, add-ons,

extended warranties, any of the kind of extras that might tempt

you to spend a little more.

Because in that moment you are considering big prices.

And these extra costs, by comparison, may seem small.

But those extra dollars you are spending

are the same dollars that might seem important when

you are considering smaller purchases,

like that box of cereal that you buy on a regular basis.

If you understand the Weber-Fechner Law of Pricing,

more of your money might stay in your wallet.