Why Aren’t Prices Rounded Off?
From the blog “We’re Only Human” (which I’ve just discovered, but which seems great):
University of Florida psychologists Chris Janiszewski and Dan Uy suspected that something fundamental might be going on, that some characteristic of the opening bid itself might influence the way the brain thinks about value and shapes bidding behavior. In particular, they wanted to see if the precision of the opening bid might be important to how the brain acts at an auction. Or to put it in more familiar terms: Are we really fooled when storekeepers price something at $19.95 instead of a round twenty bucks?
Janiszewski and Uy ran a series of experiments to test this idea. The experiments used hypothetical scenarios, in which participants were required to make a variety of “educated guesses.” For example, they had participants think about a scenario in which they are buying a high-definition plasma TV, and asked them to guesstimate the wholesale cost. They were told the retail price, plus the fact that the retailer had a reputation for pricing TVs competitively.
But there were three scenarios involving three retail prices: Some hypothetical buyers were given a price of $5000, while others were given the price of $4988 and still others $5012. When all the buyers were asked to estimate the wholesale price, those with the $5000 price tag in their heads guessed much lower than those contemplating the more precise retail prices. That is, they moved farther away from the mental anchor. What’s more, those who started with the round number as their mental anchor were much more likely to guess a wholesale price that was also in round numbers. The scientists ran this experiment again and again with different scenarios, and always got the same result.
Why would this happen?
Read the post to find out!