The Analytic Age

I was leafing through a recent issue of the journal Marketing Science over the weekend and came across an article titled “The Price Precision Effect“. According to the article abstract, the authors found that, in the US residential housing market,

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.

I was intrigued! I have seen academic work on the effect of price endings, magic prices etc. in retail stores (example – behind Harvard Business Review paywall, PDF of the HBR article on Oregon State website) but I had not come across research on the psychology of price perception on big-ticket items like homes.

I delved into the details of the study that led to the finding cited above but came away disappointed.

In the study, the authors used university students in a laboratory setting, rather than actual home buyers or sellers. Further, prices were shown to the participants in such a way that each precise price-list price pair wasn’t shown to the same individual. As a result, the comparison between a precise price and its round price sibling was done indirectly across all the individuals. In short, the study setting was a bit too far from the real-world for me to take the finding seriously.

I scanned the other studies described in the article (there are five in total) and found the following in Study 5:

we collected data from actual real estate transactions and tested whether the precision or roundness of list prices influence the magnitude of the sale prices.

Actual real estate transactions. That sounded promising. What did they find?

buyers pay higher sale prices when list prices are more precise.

This is interesting and potentially useful. Just by making the list price look precise, the buyer’s willingness-to-pay goes up. How high?

consider two houses in Long Island with the same zip code and with the same number of rooms and other features; one has a list price of $485,000 and the other has a more precise list price of $484,880. Our results suggest that the house with the more precise list price will sell for about $1,200–$1,450 more.

Not huge but since the effort involved in making a price look precise is close to zero, the ROE (Return on Effort) is very high.

How exactly did the authors quantify this effect?

To assess the effect of price precision on buyer behavior, we regressed the sale price on each of our three measures of price precision.

The authors measure price precision in several different ways (e.g., number of ending zeros in the price, a 0-1 dummy variable that indicates if the price had 3 ending zeros or not) and the results are consistent across these runs.

Comfortingly, the authors controlled for a number of other variables in the regression.

We also controlled for other factors that may be correlated with both the precision of the list price and the amount of the sale price. These other factors can be broadly grouped into four categories: property-specific, agent-specific, time-specific, and market-specific.

For example, the property-specific variables included

… square footage, number of bedrooms, number of bathrooms, age of the house, as well as dummies for house style, type of heating system, etc.

The other categories were similarly represented.

Overall, I am inclined to believe this finding. While it is not an experimental study, it does use actual real-estate transactional data, carefully controls for confounding variables, and identifies an effect that doesn’t seem outlandishly large.

Best of all, it is easy to put into practice: the next time you put your home on the market, make sure the list price doesn’t have three ending zeros!