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The Range Effect

It’s called range effect, the range of some quantity is given by the span of its potential values.

What is the range effect

For example, fast food prices vary over a small range only a few dollars, prices of jackets vary over a larger range tends to hundreds of dollars and televisions very over an even larger range hundreds to thousands of dollars. Here’s the basic principle of a range effect.

If the typical price for espresso and biscotti in your area is $5 when you see that a new coffee shop charges $10 for the same thing you might walk out muttering that the coffee here is way too expensive. If a typical price is $5 for each extra dollar represents 20% of that range, a huge effect.

What matters is not the absolute change in price but the relative change in price compared to the range. This phenomenon allows us to explain both sides of our paradox the same $5 savings represent a large proportion of the range when were purchasing coffee, a much smaller proportion were buying a jacket and a tiny fraction when we are picking up the new television.

Time is more valuable than money

The same idea applies with time: if we expect to wait in the drive-through lane for only a minute or two and that sets our expected range for waiting on the scale of minutes, a three-minute way that one chain may seem interminable while a 30 sec wait seems wonderful.

The vary speed of fast food service exaggerates small differences in waiting time, making time much more valuable than money. Range effects are intimately related to the idea of reference dependence. Remember, that outcomes are good or bad not based on some absolute value but on their relative value compared to some reference point.

We reset our sense of value so that things better than the reference point are seen as good and things were worse than the reference point are seen as bad. Range effects involve changing the scale.

A flexible mental ruler

It’s as if we have a mental ruler that can be stretched or shrunk to accommodate the range of a given decision. When that ruler is stretched to a very large range the change needs to be really large to matter, but when the ruler is shrunk to a small range and a small change can seem very important.

The range effects may seem like yet another bias in our decision-making, something curious and interesting but ultimately not that important. Range effects aren’t specific to decision-making.

They affect what we perceive how we move and even what we remember. They arise because of a basic feature of our biology: how are set up to deal with information across different scales, so I like to give you some insight into why we experience range effects.

Our experiences depend on relative changes

Imagine that you are walking along a country road on a dark night. There is a new moon overhead so the only light comes from the stars above. Your eyes adapt to the darkness and you see a piece of white paper on the road in front of you.

A white piece of paper still appears white when viewed outside during starlight just as it does in the bright afternoon sunlight. It doesn’t appear white because of the absolute number of photons bouncing off the paper and hitting your retina. Indeed the absolute number is about a million times greater in sunlight impaired starlight.

It appears white because it reflects relatively more photons than the surrounding dark road. That’s reference dependence. Our experiences depend on relative changes compared to some reference point.