One of Alfred Hitchcock’s most enduring bits of cinematic comedy is the auction scene in the espionage thriller North by Northwest. Cary Grant plays Roger Thornhill, a businessman who has been mistaken for a CIA agent by the ruthless Phillip Vandamm. At a critical juncture, Thornhill is cornered by his enemies inside a Chicago auction house, and the only way he can escape is by drawing attention to himself. When the bidding on an antique reaches $2,250, Thornhill yells out, “Fifteen hundred!” When the auctioneer gently chides him, he loudly changes his bid: “Twelve hundred!” When the bidding on a Louis XIV chaise longue reaches $1,200, Thornhill blurts outs, “Thirteen dollars!” The genteel crowd is outraged, but Thornhill gets precisely what he wants: the auctioneer summons the police, who “escort” him past Vandamm’s henchmen to safety.
Clever thinking and good comedy. It is funny for a lot of reasons, and one is that Thornhill violates every psychological “rule” for how we negotiate price and value with one another. So much of life involves “auctions,” whether it is buying a used car or making health care choices or even choosing a mate. But, unlike Roger Thornhill, most of us are motivated by the desire for a fair deal, and we employ some sophisticated cognitive tools to weigh offers, fashion responses, and so forth—all the to-and-fro in getting to an agreement.
But how does life’s dickering play out in the brain? And is it a trustworthy tool for getting what we want? Psychologists have been studying cognitive bartering for some time, and several basics are well established. For example, an opening “bid” of any sort is usually perceived as a mental anchor, a starting point for the psychological jockeying to follow. If we perceive an opening bid as fundamentally inaccurate or unfair, we reject it by countering with something in another ballpark altogether. But what about less dramatic counter offers? What makes us settle on a response?
University of Florida marketing professors 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 degree of 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 20 bucks?
Janiszewski and Uy ran a series of tests to explore this idea. The experiments used hypothetical scenarios, in which participants were required to make a variety of “educated guesses.” For example, they had subjects think about a scenario in which they were buying a high-definition plasma TV and asked them to guesstimate the wholesale cost. The participants were told the retail price, plus the fact that the retailer had a reputation for pricing TVs competitively.
There were three scenarios involving different retail prices: one group of buyers was given a price of $5,000, another was given a price of $4,988, and the third was told $5,012. When all the buyers were asked to estimate the wholesale price, those with the $5,000 price tag in their head guessed much lower than those contemplating the more precise retail prices. That is, they moved farther away from the mental anchor. What is 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? As Janiszewski and Uy explain in the February issue of Psychological Science, people appear to create mental measuring sticks that run in increments away from any opening bid, and the size of the increments depends on the opening bid. That is, if we see a $20 toaster, we might wonder whether it is worth $19 or $18 or $21; we are thinking in round numbers. But if the starting point is $19.95, the mental measuring stick would look different. We might still think it is wrongly priced, but in our minds we are thinking about nickels and dimes instead of dollars, so a fair comeback might be $19.75 or $19.50.
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17 Comments
Add CommentAnd there was me thinking it was all to do with giving change...
Reply | Report Abuse | Link to thisBack in olden times, when five cents was actually worth five cents (or marks or pence or drachmas, insert the currency of your choice here...), shop-keepers would price their items to deliberately avoid round numbers - 19.95 instead of 20.00. This was to ensure that their staff had to open the till (and thus record the transaction) to give change, and not pocket the money.
So - old time wisdom 1, psychological babble 0
Historically, merchants put the nines in once cash registers had been invented. They wanted their employees to enter the amounts in the machine, rather than doing totals in their heads. R
Reply | Report Abuse | Link to thisSo, Why are things marked as $19.95 in the US, but as £19.99 in the UK? Does that 4 cents/pence really make a difference? In which case are my UK shopkeepers making 4p on every purchase?
Reply | Report Abuse | Link to thisI disagree. To me, precise numbers signal that that seller (presenter, politician etc) has done the research, worked out his optimal values and will be hard to bargain with. Round numbers are a sign of sloppy thinking that can be taken advantage of.
Reply | Report Abuse | Link to thisI've heard two alternative explanations for the $19.95 phenomenon. One is that sales taxes were based on whole dollar amounts (for ease of calculating percentiles), so the merchants were getting most of that extra dollar ; the other is that $9.95 looks smaller (fewer digits) than $10.00, and because we read from left to right, we see $19.95 as less than $20.00.
Reply | Report Abuse | Link to thisI've also read that we've become so ingrained to see 9s as indicating a mark-down in price that sales of a product actually increased when the price was changed from 96c to 99c.
I can't explain the 95c vs. 99p dichotomy, but in Australia, 1c and 2c pieces were abolished and 5c is the smallest coin available - yet many book distributors here have just increased prices from (for example) $32.95 to $32.99. This is rounded up by cash registers to $33, saving the need to give change, but it still has the psychological impact of the 9s. (In Australia and the UK, sales taxes are already factored into retail prices.)
"(In Australia and the UK, sales taxes are already factored into retail prices.)"
Reply | Report Abuse | Link to thisAs they SHOULD be everywhere...
The one that really blows me away are fuel prices at say 3.599 -- my thought is always --- looks like $3.60 to me.
Reply | Report Abuse | Link to thisshop keepers used to set odd prices like 19.95 so that the cashier had to open the drawer to give change--instead of pocketing the money.
Reply | Report Abuse | Link to thisYep, Bunnylove. Spot on.
Reply | Report Abuse | Link to thisThat practice was begun by that great foreign entrepreneur Jacques Claude Penney'.
I am told when I was in USA that 99.99 is a smaller number than say 100. 99.99 registers in mind like a 2 digit nubmer and 100 like a 3 digit. So it is a Marketing trick to make the buyer make faster decistion thinking that the price is affordable even when there is only a cent difference between the two. Less coginative dissonecne for the buyer when it is priced at 99.99 or 99.94 than 100. Any way when paying with a cheque one might write 100.
Reply | Report Abuse | Link to thisJust a note to joerocker, I disagree that taxes should be included in the price, I think it's important for people to know exactly how much money their government is taking from them.
Reply | Report Abuse | Link to thisI thought it was so when the sales taxes is added on it will come out to close to a whole number
Reply | Report Abuse | Link to thisI thought it was so you think it is cheaper.Then you are more likely to buy the product. This is a very interesting.I would like to know more about this study.
Reply | Report Abuse | Link to thisAfter taxes it's over 20. if it's 19.95 so just round up....if u are smart enough to do that.
Reply | Report Abuse | Link to thisThe truth is that pricing at 19.99 rather than 20.00 began as a result of sales tax. The sales tax system was charging .02 cents tax increments at round price intervals. By charging customers 19.99 therefore they would cost them selves .01 but save their customers .01+.02
Reply | Report Abuse | Link to thisI wish we start thinking about patients well being, progress of disease, patients improvement, complaince about treatment and physician competence in mathematical terms. That is really urgently needed in present days.
Reply | Report Abuse | Link to thisSam K
I also note that the same theory works with speed limits. For example: a speed limit of 15 mph is routinely ingnored, however if the speed limit is posted as 13 mph drivers will more closely monitor their speed.
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