“SHARP” NUMBERS BENEFIT SHARP SELLERS

We are getting ready to sell our house and we need to establish a price. We have two list prices that we are considering. The first is $420,000. The other alternative is $420, 399. Which listing price will result in a higher sales price?

If you have been reading the Desert of the Real Economics site long enough, you will probably guess that the correct answer is that which defies “common sense”.

According to a study recently published entitled “Do Consumers Perceive Precise Prices to be Lower than Round Prices? Evidence from Laboratory and Market Data”, described in an article on Blogcritics on-line magazine, the more “precise” figure of $420,399 will garner a higher sale price.


THE MORE ZEROES, THE BIGGER IT LOOKS.

This finding, and others like it, derives from studies undertaken by marketing professor Manoj Thomas and colleagues at Cornell University’s Johnson School. Thomas and other consumer marketing researchers have found that people have an innate tendency to downplay the magnitude of precise numbers, such as $325,437, also known as “sharp” numbers, compared to imprecise figures ending in one or more zeros--the familiar round numbers like $325,000.

“A seller of a house can list the house for a more precise price such as $395,425, or the more round price of $395,000,” writes Thomas. “Is the buyer’s evaluation of the precise price likely to be any different than that of the round price?”

The answer lies in a quirk of human psychology related to number processing, Thomas says. A built-in “precision heuristic” leads us to the false conclusion that sharp numbers are usually smaller than round numbers. As a result, sharp prices are usually seen as smaller than round prices. The tendency to round off large, precise numbers to the nearest imprecise multiple of 10 leads people to unconsciously associate large, round numbers with, well, largeness. Conversely, “because people encounter large, precise numbers infrequently, they will associate precision with smaller magnitudes.”

THE BUTCHER, BAKER AND CANDLESTICK MAKER FIGURED IT OUT YEARS AGO.

The same effect occurs when the price is $19.99 instead of $20.00. Although the difference is only a penny, $19.99 sounds like less. And there is another phenomenon at work, the “Left Digit Effect”. Because people read from left to right, and the leftmost digit represents the magnitude of the number, this is the first stop for the brain. The two in 20 is greater than the one in 19.99, so that is the common interpretation.

Since we process multidigit numbers from left to right, says Thomas, “one explanation is that encoding the magnitude of a multidigit number begins even before we finish reading all the digits.” It is the change in the left digit, not the penny, that makes the difference.

A PENNY FOR YOUR LACK OF THOUGHT ALWAYS SPENDS IN THE DESERT OF THE REAL!