Sunday, June 29, 2008

Sunday dollars+sense: Why do prices end in nines?

When you go out looking for petrol today what do you expect to pay? Will it be 169.9 cents per litre, or perhaps 164.9?

Whatever the price, it is certain to end in a nine.

But why, when we all know that for practical purposes 169.9 is 170?

Surely it can’t be because we’re all fooled into believing that we are paying a lower price?

The reassuring news just published in the journal Psychological Science is that there’s something more basic at play.

The price 169.9 signals something other than a lower version of 170. It signals precision...

When selling engraved gravestones in the 1970s my grandfather used to add up each of the individual costs and present the bereaved customer with an exact - if over-precise - figure.

Professors Chris Janiszewski and Dan Uy from the University of Florida believe that he knew what he was doing.

To test their theory they asked a number of volunteers to guess the wholesale price of a hypothetical plasma TV.

One group was told it’s retail price was $5,000, another was told it was $4,988, another: $5,012.

The lowest wholesale price was picked not by those who had been given the lowest retail price, but by those who had been given the roundest: $5,000.

As the professors see it, we begin with an anchor in our mind – the quoted price – and then move away from itin increments.

But the increments are smaller the more precise is the starting price.

As they put it, if we see a toaster priced at $20, we might wonder whether it should really be $18 or $22. But it we see a toaster priced at $19.95, we might wonder instead whether it should be $19.75 or $19.50.

They checked out their theory using Florida real estate prices. They found that sellers who listed their homes more precisely using a figure such as $494,500 got a better price than those who quoted a round number such as $500,000.

And the houses that had been on the market for a couple of months lost less of value when the asking price seemed precise than they did when it seemed round.

So please don’t think badly of your service station or your supermarket when it quotes you a prices ending in 99 cents.

They’re not doing it because they think you’re a mug.

Or at least not in the way that you had probably thought.

Chris Janiszewski and Dan Uy, Precision of the Anchor Influences the Amount of Adjustment, Psychological Science 19 (2) , 121–127 (2008)