Heuristics in Numerical Cognition: Implications for Pricing

Abstract

In this chapter we review two distinct streams of literature, the numerical cognition literature and the judgment and decision making literature, to understand the psychological mechanisms that underlie consumers' responses to prices. The judgment and decision making literature identifies three heuristics that manifest in many everyday judgments and decisions - anchoring, representativeness, and availability. We suggest that these heuristics also influence judgments consumers make concerning the magnitude of prices. We discuss three specific instances of these heuristics: the left-digit anchoring effect, the precision effect, and the ease of computation effect respectively. The left-digit anchoring effect refers to the observation that people tend to incorrectly judge the difference between $4.00 and $2.99 to be larger than that between $4.01 and $3.00. The precision effect reflects the influence of the representativeness of digit patterns on magnitude judgments. Larger magnitudes are usually rounded and therefore have many zeroes, whereas smaller magnitudes are usually expressed as precise numbers; so relying on the representativeness of digit patterns can make people incorrectly judge a price of $391,534 to be lower than a price of $390,000. The ease of computation effect shows that magnitude judgments are based not only on the output of a mental computation, but also on the experienced ease or difficulty of the computation. Usually it is easier to compare two dissimilar magnitudes than two similar magnitudes; overuse of this heuristic can make people incorrectly judge the difference to be larger for pairs with easier computations (e.g., $5.00 - $4.00) than for pairs with difficult computations (e.g., $4.97 - $3.96). These, and the other reviewed results, reveal that price magnitude judgments entail not only deliberative rule-based processes but also instinctive associative processes.

Keywords: Behavioral Pricing, Heuristics, Numerical Cognition