You’re selling your house. You set the asking price at a nice round figure–$420,000, let’s say. But if you had chosen to list the house for $420,399—almost $400 more–your chances of finding a buyer just might improve.
This finding, and others like it, derives from studies undertaken by marketing professor Manoj Thomas and colleagues at Cornell University’s Johnson School. Thomas and other consumer marketing researchers have found that people have an innate tendency to downplay the magnitude of precise numbers, such as $325,437, also known as “sharp” numbers, compared to imprecise figures ending in one or more zeros–the familiar round numbers like $325,000.
“A seller of a house can list the house for a more precise price such as $395,425, or the more round price of $395,000,” writes Thomas. “Is the buyer’s evaluation of the precise price likely to be any different than that of the round price?”
The answer lies in a quirk of human psychology related to number processing, Thomas says. A built-in “precision heuristic” leads us to the false conclusion that sharp numbers are usually smaller than round numbers. As a result, sharp prices are usually seen as smaller than round prices. The tendency to round off large, precise numbers to the nearest imprecise multiple of 10 leads people to unconsciously associate large, round numbers with, well, largeness. Conversely, “because people encounter large, precise numbers infrequently, they will associate precision with smaller magnitudes.”
How is this possible? Homebuyers are presumed to be rational people, with their own economic interests firmly in mind. Does a negligible increase or decrease in price—from a round number like 395,000 to a sharp number like 395,425–really make a house seem more affordable and possibly clinch the sale?
Thomas and coworkers analyzed 27,000 real estate transactions in two different states, based on extensive multiple listing records. “We found that more precise list prices are correlated with higher sale prices,” Thomas wrote. This is because “buyers perceive precise list prices to be lower, and therefore accept higher sale prices.” The more zeros there are in the asking price of a six-figure house, the less likely prospective buyers are to judge it affordable.
There are all kinds of other considerations that make up a purchase decision, of course—things like bank account, stress, level of motivation, even the day’s weather. Nonetheless, house sellers frequently round off the asking price. Those that do not may have the edge.
Retailers have long sensed this effect and profited from it. The retail practice of ending prices in 9s exploits a related aspect of the way we process numbers. Psychologically, the difference between $19.99 and $20.00 is often the difference between buying and not buying. While the “sharp” number is a penny cheaper (not necessarily a strong enough advantage to clinch the sale), the number 1999 also benefits from a related fact of numerical cognition—the “Left-Digit Effect.” Put simply, if a price increase changes the leftmost digit to a higher number (in this case, from a 1 to a 2) it might just be No Sale.
Since we process multidigit numbers from left to right, says Thomas, “one explanation is that encoding the magnitude of a multidigit number begins even before we finish reading all the digits.” It is the change in the left digit, not the penny, that makes the difference.
If we are talking about housing prices, the change from 0s to 9s—from rounds to sharps—can add up to a lot of pennies. It can mean a difference of thousands of dollars for individual buyers, and millions for the home-building industry at large.