Weber’s Law
July 11, 2008 – 6:17 am
According to Wikipedia:
The Weber–Fechner law attempts to describe the relationship between the physical magnitudes of stimuli and the perceived intensity of the stimuli.
What this means is that we tend not to notice small changes to big things but will notice small changes to small things. For example, Weber performed a test that showed a person can only tell the difference in the weight of an object once it reaches a percentage of the base weight.
This is true in a variety of situations, including our food consumption. Scientists have discovered that the human tongue cannot distinguish a 5% different in two salt solutions. Food companies that choose to reduce the salt in their products can therefore reduce the salt content by 5% or less on a regular basis without consumers realizing the change.
We can draw similar conclusions with our finances. For example a $1,000 raise is much more meaningful to someone who earns $20,000 than someone who earns $100,000. I know, I know. You’re thinking “Thank you Captain Obvious”. 
What may not be readily apparent, however, is that Weber’s law also affects our investing decisions. We’re more likely to risk investment gains than we are our original investment dollars.
Also note that we’re more likely to judge gains and losses by themselves rather than as a percentage of our entire portfolio or net worth. If one of your mutual funds, for example, has a significant gain or loss, we’re likely to make decisions based on that single fact rather than based on our entire portfolio as a whole.
What’s the point? Human nature leads us to make poor decisions based on incomplete data. Be aware of this fact, and try to avoid viewing your investments as single components rather than an comprehensive portfolio.
Image Credit: atomicjeep
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4 Responses to “Weber’s Law”
True to my experience. Unfortunately, while one can reason around it it’s hard to battle the emotions attached to change. I know I’ll never be free of emotional reasoning, but I hope someday I’ll be better able to compartmentalize.
By Mrs. Micah on Jul 12, 2008
Interesting. I think this might also pertain to credit card spending – once the balance has gotten higher, a mental threshold is broken and it doesn’t seem so bad to add more to it. But raise the price of milk by a dollar or two, and we all take notice.
By Rachel on Jul 26, 2008