Relative thinking theory

The article presents a theory that I denote “Relative Thinking Theory,” which claims that people consider relative differences and not only absolute differences when making various economics decisions, even in those cases where the rational model dictates that people should consider only absolute differences. The article reviews experimental evidence of this behavior, discusses how we can formalize this behavior, and addresses several issues related to relative thinking. Finally, the article explains why firms seem to respond to relative thinking of consumers, and suggests additional implications of relative thinking for economics and management.