Wed June 1, 2011
Planet Money

This Blog Post Costs $3.99

When something costs $3.99, you just round up and tell yourself it costs $4.00. Right?

Maybe not.

A growing body of research suggests that charging, say, $3.99 rather than $4.00 may actually be an effective trick.

In one study, researchers offered people a choice between two different pens.

When the pens were priced at at $2.00 and $3.99, nearly half of the people chose the more expensive pen.

But when the prices changed by a single penny, to $1.99 and $4.00, fewer than 20 percent of people chose the more expensive pen.

Social scientists call this the "left-digit bias" — peoples' tendency to place too much weight on the leftmost digit of a number.

"We have limited time to process stuff, so we take shortcuts," the economist Nicola Lacetera told me.

This makes some sense if something is super cheap — like, say, a pen. But people also exhibit left-digit bias with really expensive things — like, say, used cars.

Lacetera and a couple other economists recently looked at sales data from millions of used cars sold at auction. (Here's the abstract of their paper.)

They found that the price of a car drops significantly when the mileage crosses multiples of 10,000.

For example, cars with 80,000 miles sell for about $210 less, on average, than cars with 79,900 miles.

By comparison, cars with 79,900 miles sell for about $10 less, on average, than cars with 79,800 miles.

This is particularly striking because there's nothing hidden about the number, and because the irrational price jump appears at every 10,000-mile increment up to 100,000 miles.

"The market is so thick and competitive," Lacetera said. "You would expect this to be washed out, and it's not."

This phenomenon — driven, ultimately, by a kind of inattention to numbers — may play out in other spheres as well. For example, Lacetera speculated that students' chances of being admitted to college may jump irrationally as test scores cross big, round-number thresholds.

"We need to pay more attention to inattention," Lacetera said.

Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.