This post is an experiment in writing collaboratively with Claude. I described the core idea; Claude asked clarifying questions, then drafted using my previous posts to guide writing style. We refined it together from there.
Suppose you’re choosing between two chocolate bars: the premium one costs three times as much but tastes noticeably better. Which should you buy? It depends on the actual prices! If they’re $5 and $15, maybe it’s not worth the $10 upgrade. However, if you find them on sale for $0.50 and $1.50, it’s probably worth the extra dollar for the better chocolate. Same ratio, different decisions.
It’s tempting to just look at the ratio - 3x the price for less than 3x the quality, so get the cheaper one, right? This is a common mistake in economic reasoning. When comparing options, the relevant quantities are the absolute difference in price and the absolute difference in utility.
This bias is well-documented. In a classic 1981 study, Tversky and Kahneman found that 68% of people would drive 20 minutes to save $5 on a $15 calculator, but only 29% would make the same trip to save $5 on a $125 calculator. Same $5, same 20 minutes, different decisions. Your time is worth the same amount regardless of what you’re buying. The $5 saved doesn’t care what fraction of the overall price it is.
One exception: factor-thinking can be a useful heuristic when comparing unit prices across many purchases. If Store A is 20% cheaper than Store B on average, that’s a reasonable shorthand for deciding where to shop. But the decision still comes down to absolute difference: estimate your total spend, multiply by the factor, and that’s your actual dollar savings. That number, not the percentage, is the thing to balance against other considerations.
If you catch yourself thinking in terms of percentages or factors when comparing prices, stop and ask instead: what’s the actual dollar difference, and what else could I do with that money? And on the other side: what’s the actual difference in utility that I’m getting for that price difference? Both questions need concrete answers, not ratios.