2007 Headlines
Consumers Misjudge Precise Prices
October 16, 2007 | Ithaca, NY - The precision or roundedness of prices can affect magnitude perceptions, which may lead to faulty judgments according to a new study by assistant professor of marketing Manoj Thomas, associate professor of marketing and economics Vrinda Kadiyali and assistant professor of applied economics and management Daniel H. Simon of Cornell University.
The study, "Do Consumers Perceive Precise Prices to be Lower than Round Prices?" finds that people incorrectly judge precise prices such as $305,425 to be lower than rounded prices of similar value such as $305,000. The study was conducted using both laboratory and market data from residential real estate transactions. The researchers factored in results from more than 27,000 residential real estate transactions for home prices in South Florida and Long Island. The results indicate that this can influence buyers' price magnitude judgments and consequently affect the sale prices of houses.
There is evidence of greater prevalence of precision in smaller numbers and roundedness in larger numbers. For example, populations of countries and government budgets are routinely expressed in millions or billions, whereas the price of gas is expressed down to the last cent. This pattern leads people in to believing that a precise number is likely smaller, and can therefore lead to biased judgments.
We find that people learn to associate precision with smaller magnitudes, and that this association biases their price magnitude judgments, say the authors. Buyers perceive precise list prices to be lower. These results have substantive implications for buyer and seller behaviors, and theoretical implications for the understanding of price cognition process. For sellers of homes or other major items, the implications appear to be that precise prices may fetch a higher final sale price.
