People don't value money linearly. You wouldn't pay an additional $10 for a cup of filter coffee, but most people wouldn't think twice about paying an additional $10 for a car. But it's the same amount of money, so surely that's irrational in that situation.
In other situations it makes complete sense. If you have $1M, losing $10 isn't nearly as big a deal as when those $10 were all you had.
If you try to apply game theory to economics you apply a utility function to money to model this, and a logarithmic function maps quite well to how humans think about money.
In other situations it makes complete sense. If you have $1M, losing $10 isn't nearly as big a deal as when those $10 were all you had.
If you try to apply game theory to economics you apply a utility function to money to model this, and a logarithmic function maps quite well to how humans think about money.