The same observation may have a different effect, depending on one’s view or starting point. The
core of the relative evaluation theory states that judgments based on perception are influenced by previous experiences that people have encountered.

The perception and evaluation of gains and losses is dependent on the reference point:

DECREASING SENSITIVITY: people are more pleased with the first gain than with the second one, but
more with the second than with the third one. The same effect is observed in the loss zone – people
are really annoyed about the first loss, but less so with the second one. They can become risk-
averse from a particular point onwards and thus incur significant losses.
DISPOSITION EFFECTS: this is the inclination to realize profits too soon and to hang on to losses for too
long. If an investor has achieved a high increase in value following a rise in the price, compared with
the cost price, he will cash in on his gain, because a further rise in the price offers a small increase
in value. If an investor faces a drop in the value of his shares, a further drop in price does not matter
to her a much as the previous price fall, and she will tend to hang on to the loss even when there is
a small chance that the price will recover.
THE SUNK COST EFFECT: this is the effect that already incurred costs may have on the willingness to
invest further. It causes people to hang on for a disproportionately long time to unsuccessful projects, even if their failure can be predicted early on. The effect is intensified if the venture is in the public eye.The more people know about an unsuccessful project, the harder it is to abandon such an
enterprise at an early stage.

The effect of time on judgment
Periods of time become increasingly less important as they are further removed from the present.
People would rather have something today than later – as a result the utility of a product is reduced
if it becomes available later. Additionally, the same period of time is not perceived as being of the
same length. The sense of time depends on the distance from the present time.