One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4.00 on a grocery item that costs $10.00 in a local store. But he is unwilling to drive 20 minutes out of his way to save $10.00 on a laptop that costs $400.00 at a local store. In percentages how big is his savings on the grocery item? On the laptop? In absolute terms, how big is the savings on the grocery item? On the laptop? If Samir is willing to sacrifice 20 minutes of his time to save $4.00 in one case, shouldn't he be willing to sacrifice 20 minutes of his time to save $10.00?

Question

One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4.00 on a grocery item that costs $10.00 in a local store. But he is unwilling to drive 20 minutes out of his way to save $10.00 on a laptop that costs $400.00 at a local store. In percentages how big is his savings on the grocery item? On the laptop? In absolute terms, how big is the savings on the grocery item? On the laptop? If Samir is willing to sacrifice 20 minutes of his time to save $4.00 in one case, shouldn't he be willing to sacrifice 20 minutes of his time to save $10.00?

Answer 1

he is saving 40% on the $10 item

but only 2.5% on the $400 item

Answer 2

To determine the savings in percentages, we can use the formula:

Percentage savings = (Savings / Original cost) * 100

For the grocery item:
Original cost = $10.00
Savings = $4.00

Percentage savings on the grocery item = ($4.00 / $10.00) * 100 = 40%

For the laptop:
Original cost = $400.00
Savings = $10.00

Percentage savings on the laptop = ($10.00 / $400.00) * 100 = 2.5%

Now, let's calculate the absolute savings.

For the grocery item:
Absolute savings = $4.00

For the laptop:
Absolute savings = $10.00

Based on these calculations, the absolute savings on the grocery item are $4.00 and $10.00 for the laptop.

As for the question of why Samir is willing to sacrifice 20 minutes of his time to save $4.00 on the grocery item but not for $10.00 on the laptop, it is a matter of how people perceive value.

In this case, Samir is valuing the savings in percentage terms rather than the absolute dollar amount. Even though the percentage savings on the laptop is lower, the actual dollar amount saved ($10.00) is higher compared to the grocery item ($4.00). However, since Samir is focusing on the percentage, he may see the grocery item's savings as a better deal.

Systematic error can occur when individuals fail to consider the absolute dollar amount saved and instead solely focus on percentages. This bias can lead to suboptimal decision-making, as it does not accurately reflect the true value gained or lost.