The $1.99 Effect

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Which is more, $395,425, or $395,000?

In civil trials, damages evidence is almost never clear to the penny. Instead, lawyers make judgment calls about the exact amount of damages to ask for. A new study suggests the decision may make more difference than you thought.

This paper has been out for awhile, but I missed it until it was on NPR this morning. Researchers from Cornell University’s Johnson School of Management report that many of us misunderstand basic quantities because we’re fooled by whether the number is “precise,” like the $395,425 figure above, or rounded. And we’re fooled in the same way: we think the precise number is smaller than it really is. In the example above, a surprising number of people respond that $395,425 is the lower price — and it isn’t.

I’ll take that one

And the “precision heuristic” doesn’t stop at simple miscalculation. In an experiment that assigned precise and rounded numbers to hypothetical home prices, the researchers found that subjects were more willing to buy when the price was precise.

Why are we so easily fooled? The authors considered whether the precise price sent a stronger signal that the seller had taken more care to set the price, or was more willing to bargain, than a rounded price would. They couldn’t rule these possibilities out, but another explanation seemed more likely: we’ve learned to think this way. From the discount store to the gas pump, we’re conditioned to think “discount” when we see a precise number. The experiment itself gave support to this learned-behavior theory; when the researchers primed the subjects with pairs of numbers where the rounded number was lower, the subjects got the hang of the comparision, and stopped making the mistake.

If precise numbers are more acceptable and credible until listeners are taught otherwise, the lesson for lawyers seems clear. Plaintiffs’ lawyers should think about not rounding. And defense lawyers should teach jurors the fallacy of assuming precise numbers represent real precision.

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Notes:

1. The Cornell paper is “Do Consumers Perceive Precise Prices to be Lower than Round Prices?” by Manoj Thomas, Daniel H. Simon, and Vrinda Kadiyali. It can be downloaded here from SSRN.
2. I’ve written before here on research showing we can change the way our listeners do math by changing the words we use to express math concepts.