Humans love round numbers. No one gives up at nine push-ups, and buying a 0.95 carat diamond feels like cheating. Round numbers push you to be stronger, but they also trick you into losing money. Loosely known as the round number bias, the emotional attachment is a blessing and a curse.
There doesn’t seem to be an academically accepted term for the attachment to round numbers. The phrase “round number bias” and “round number effect” to help describe the phenomenon. Yet, it’s safe to say you understand the frustration of finishing a game of bowling with only 99 points. The same irritation can steal your money.
1. Prices Ending in 9
There is no escaping the reality of prices ending with the number nine. You see it on the price of gas, clothing, and food. Even car loans are advertised with numbers ending in 9. Chevrolet is currently advertising a new car at $199 per month for 39 months.
A study from M.I.T. found two intriguing results from researching pricing strategies. Eric Anderson, from Northwestern University’s Kellogg School of Management, and Duncan Simester, from M.I.T.’s Sloan School of Management, researched how different prices affected shopping behavior. One study found that raising the price from $34 to $39 created more demand for a product. Being a dollar shy of a round number creates the emotional feeling of getting a deal.
A study from the same paper found that adding the word “sale” helps sell products even more. An item with a price ending with a 9, such as $39, can do well without any context. But if a sticker says “Reg $48 SALE $40,” it will sell better because of the comparison. Changing the sticker to say “Reg $48 SALE $39” does even better.
A great habit to counteract this round number effect is to say out loud the round number price. For example, when you see a shirt on sale for $15.99, say to yourself, “This shirt is $16.” By ignoring the sticker price, you cement in your mind a round number and help negate the power of prices ending in 9.
2. Diamond Weights in Carats
Buying diamonds can be an overwhelming experience, and jewelers are more than willing to teach you the basics. Cut, clarity, color, and carat are the four basic terms you need to know and understand. The surprising part is when you start to compare prices when only the weight changes.
The price difference between a diamond weighing 0.9 and 0.95 carats can be relatively small, but when the gems reach an even 1.0 carat, the prices jump. Price jumps can also occur at smaller weights such as 0.5 carats or 0.7 carats. It could be argued that larger stones are rarer and should cost more. Yet, there are far more diamonds on the market that weigh a round number.
Saving money on diamonds can be as simple as buying a stone weighing 0.95 carats instead of 1.0 carat. Just make sure you are at a safe distance when you tell your new fiancée.
3. Uber Surge Prices
Using Uber to traverse large cities has been one of the easiest and simplest experiences of my life. On a recent trip to San Francisco, the mass transit rail service (known as BART) was running 20 minutes behind. My wife and I were on our way to Alcatraz, and tickets for the ferry sell out days in advance. With my wife’s brother and his fiancée, we decided to ditch the train and get an Uber. We were not alone.
As soon as I opened the app to summon an Uber car, I was notified of a price surge. Our ride to Pier 39 was going to cost 2.4 times more than usual. This surge pricing changes depending on demand and many other factors. Keith Chen, the head of economic research for Uber and a behavioral economist at UCLA, was recently interviewed on the NPR podcast, Hidden Brain.
Chen remarked of how the round number effect persuaded Uber riders to accept different surge prices. He said, “So when you go from 1.9 to 2.0, you see six times larger of a drop in demand than you saw from going from 1.8 to 1.9.” Chen later said, “If anything, people take more rides at 2.1 than they did at 2,” referencing continued study of Uber rider behavior.
It hurts to pay double for anything, but the reality of surge pricing is not as bad as it may seem. For example, a ride that usually costs $20 will be $38 at a 1.9 surge and $40 at 2.0. Your mind can play some dirty tricks on you for a $2 difference.
4. Stock Market Milestones
The Dow Jones industrial average reached 18,000 points days before Christmas of 2014. It was the first time in history and a major milestone. Unfortunately, the early gift was not to last as the DJIA ended 2015 with a drop of 2.23% for the year.
In early 2015, the Wall Street Journal reported on how round numbers can influence investors. History teaches that investors are emotional, and the advice to buy low and sell high is often disregarded. In the article, Erik Davidson of Wells Fargo Private Bank predicted how his clients might react to the news. The article says, “Sure enough, when the Dow finally hit 18,000 in December, the calls from clients started rolling in, with some expressing angst that they had missed the rally by holding too much of their money in cash or fixed income.”
If Davidson had invested all the money his clients wanted, they would have likely had poor returns for 2015. The round number bias coupled with news headlines can cause poor investing decisions to be made.
Round numbers and milestones in financial markets are wonderful opportunities for the media. Claiming that a day of trading is the worst since 2008 or the best since 1999 makes for great reading, and investors eagerly respond to such headlines.
In the end, it is best to manage your investment portfolio while ignoring most headlines. A terrible year in the stock market is an opportunity to buy something cheap, and a great year is an opportunity to lock in gains. Yet, your age and situation may warrant different decisions. Stock market milestones are good reminders to review your investing strategy, but they shouldn’t be your only reminders.
5. Lists with Round Numbers
Originally, I had four examples for this article, but all my research convinced me to add a fifth way round numbers can steal your money. In this case, social media gurus and blog authors have figured out that numbered lists are nearly irresistible for online users.
Even though online articles cost no money, reading them costs you time. As they say, time is money. Learning new things is always good, so learning how to speed read is a great investment.