Kahneman received the Nobel [prize] for his work with Amos Tversky on what they called “prospect theory”. […]

One of the main tenets of prospect theory is that people don’t evaluate things in absolute terms. They evaluate them relative to a comparison standard, or “reference point”.

Reference points help explain the barbecue grill scenarios we discussed a few pages ago. People use the price they expect to pay for something as their reference point. So the grill seemed like a better deal when it was marked down from $350 to $250 rather than when it was discounted from $255 to $240, even though it was the same grill.

Setting a higher reference point made the first deal seem better even though the price was higher overall.

-Contagious, p.163