2009/08/15 by Manoj Thomas, Daniel H. Simon, Vrinda Kadiyali · 4 citations
Decision Sciences · Economics, Econometrics and Finance · Social Sciences · #Decision-Making and Behavioral Economics #Economic and Environmental Valuation #Experimental Behavioral Economics Studies
paper · doi:10.1287/mksc.1090.0512
openalex publication_date 2009/08/15 · openalex created_date 2025/10/10 · openalex updated_date 2026/07/29
We examine two questions: Does the roundness or precision of prices bias magnitude judgments? If so, do these biased judgments affect buyer behavior? Results from five studies suggest that buyers underestimate the magnitudes of precise prices. We term this the precision effect. The first three studies are laboratory experiments designed to test the existence of the precision effect and examine the underlying psychological processes. In Study 1, we find that 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. In Study 2, we show that precision is more likely to affect magnitude judgments under conditions of uncertainty. Study 3 demonstrates that manipulating prior experience with the pattern of roundness and precision in numbers can moderate the precision effect. Studies 4 and 5 examine whether the precision effect influences buyers' willingness to pay for negotiated purchases (e.g., houses). In Study 4, we conduct an experiment on a nationally representative sample of homeowners to demonstrate that participants are willing to pay more for houses when the sellers use precise (e.g., 364,578) instead of comparable round (e.g., 365,000) prices. In Study 5, we analyze data from residential real estate transactions in two separate markets and find that buyers pay higher sale prices when list prices are more precise. These empirical results enrich our understanding of the psychological processes that underlie price magnitude judgments and have substantive implications for buyer and seller behavior.