The Price Precision Effect: Evidence from Laboratory and Market Data

Abstract

We examine two questions: Does the roundness or precision of prices bias magnitude judgments? If so, do these biased judgments affect buyer behavior? Results from five studies suggest that buyers underestimate the magnitudes of precise prices. We term this the precision effect. The first three studies are laboratory experiments designed to test the existence of the precision effect and examine the underlying psychological processes. In Study 1, we find that precise prices are judged to be smaller than round prices of similar magnitudes. For example, participants in this experiment incorrectly judged $395,425 to be smaller than $395,000. In Study 2, we show that precision is more likely to affect magnitude judgments under conditions of uncertainty. Study 3 demonstrates that manipulating prior experience with the pattern of roundness and precision in numbers can moderate the precision effect. Studies 4 and 5 examine whether the precision effect influences buyers' willingness to pay for negotiated purchases (e.g., houses). In Study 4, we conduct an experiment on a nationally representative sample of homeowners to demonstrate that participants are willing to pay more for houses when the sellers use precise (e.g., $364,578) instead of comparable round (e.g., $365,000) prices. In Study 5, we analyze data from residential real estate transactions in two separate markets and find that buyers pay higher sale prices when list prices are more precise. These empirical results enrich our understanding of the psychological processes that underlie price magnitude judgments and have substantive implications for buyer and seller behavior.behavioral pricing, numerical cognition, roundness, precision, heuristics, biases

Focal points and bargaining in housing markets

“…A series of recent papers (Janiszewski and Uy, 2008;Thomas et al, 2010;Mason et al, 2013;Backus et al, 2015), though, provide evidence that in negotiations if the first offer (or listing price) is more precise (i.e., not round) that the other party appears to bargain less forcefully and outcomes are closer to the initial offer. Janiszewski and Uy propose that this effect arises because precise numbers trigger people to think in a finer classification scale and hence adjustment from an initial anchor happens over a tighter range of values.…”

Precise performance: Do citizens rely on numerical precision as a cue of confidence?

“…The three experiments reported on here aimed at extending research on numerical precision as a confidence cue in a political-administrative setting (Janiszewski & Uy, 2008;Thomas et al, 2010;Mason et al, 2013;Jerez-Fernandez et al, 2014;Zhang & Schwarz, 2013). The precision effect runs counter to a core emphasis on the value of simplicity in numerical performance data which is found in performance management and measurement research (March & Simon 1956;Moynihan, 2008).…”

“…Some have suggested that politicians might benefit from inflating their stated confidence about numbers (Wildavsky, 1964;Radzevick & Moore, 2011). Recent research suggests that one way of increasing citizens' confidence in numbers is by using more precise numbers (Janiszewski & Uy, 2008;Thomas et al, 2010;Mason et al, 2013;Jerez-Fernandez et al, 2014;Zhang & Schwarz, 2013). For instance, Mason et al (2013) find that precise offers in negotiations are perceived as more informed which prompts less adjustment away from precise offers compared with round ones.…”

The Share Price Neglect: Inverse Exponential Relation between Initial Share Price and Risk Tolerance

“…Great care was taken to only use so-called "precise prices", e.g. 14.18 instead of 14.00, to circumvent potential precision effects [13] for which precise prices are practically handled as being of lower value than comparable round prices. To minimize confounding effects of different price level distributions among the ranges, the mean buying prices for each range was approximately set to the median for the referring range and the distribution of all ranges was normal.…”