The seeming irrationality of the customers choice may disappear after the cost of decision-making is taken into account.
In our daily life we are constantly required to estimate trade-offs between things that are very difficult to quantify (e.g. pleasure of wearing a new jacket - money that has to be paid – extra hours of work to earn this money - …). Hence using simple subconscious heuristics (such as “improving the trade-off by 50% is worthy of your time, 5% is not”) is very helpful. A constant search for an optimal solution would make a nightmare out of our every decision, which is hardly worth an occasional 5$ saving.
In this specific example, I believe that increasing the price differentials would have justified an additional mental effort, leading more people to the “optimal choice”.
Good point. It's worth noting that those heuristics can use dollar values as well, although percentages are more cognitively natural.
From Tversky and Khaneman's "The Framing of Decisions and the Psychology of Choice" (Science, Vol. 211, No. 4481, 1981):
This one's a killer. Money is supposed to be fungible, but these observations really highlight how difficult it is to really behave as if you believed that. So, aspiring rationalists, how might we combat this in ourselves? Maybe it would help to consciously convert between money and time: if you value your time at 25 $/hr, then the cost of a twenty-minute drive is 25 $/hr * (1/3) hr = $8.33 > $5, so you buy the calculator in front of you in either case. So this heuristic at least takes care of the calculator problem, although I would guess it fails miserably in other contexts, I currently know not which.
Another takeaway lesson is to ignore advertisements boasting that a product is currently such-and-such percent off. We don't care about the percentage! How many minutes are you saving?