Anchoring on Historical Round Number Reference Points: Evidence from Durable Goods Resale Prices

70 Pages Posted: 19 Aug 2020 Last revised: 28 Feb 2022

See all articles by Scott S. Wiltermuth

Scott S. Wiltermuth

University of Southern California - Marshall School of Business

Timothy Gubler

Brigham Young University

Lamar Pierce

Washington University, Saint Louis - John M. Olin School of Business

Date Written: February 26, 2022

Abstract

This paper examines how people price the resale of durable goods in systematically biased ways. We show across four studies that the anchoring effect of durable goods’ prior sales prices on subsequent valuations is discontinuous at psychologically-salient round number reference points (e.g., $10,000 increments) because these numbers create qualitative differences in how people perceive values below them vs. values at/above them. Resellers set disproportionately larger subsequent prices when previous prices move from just below round-number thresholds (e.g., $349,000) to those at or just above these thresholds (e.g., $351,000). The findings show that buyers who pay a price just below a round number therefore may sacrifice money because they receive disproportionately less when reselling the good. Market forces only partially attenuate this pricing bias, but valuator experience seems to play moderating role. Archival data shows that home buyers who previously paid just under a $10,000 reference point subsequently listed their homes for about 1.8 percent (over $3700) less on average than did buyers selling comparable homes who previously paid at or above a round number threshold. This drop is observable controlling for home characteristics and the general relationship between previous and current prices. Three experimental studies looking at housing and used car markets replicate these findings, highlight the mechanism, and increase confidence in causality. Market mechanisms and the negotiation process attenuate discontinuities by about 30%, but lower initial listing prices persist to final sales prices. We find additional weak evidence suggesting valuator experience may attenuate intergenerational pricing bias.

Keywords: Anchoring, Real Estate, Reference Points, Experience, Negotiations

Suggested Citation

Wiltermuth, Scott S. and Gubler, Timothy and Pierce, Lamar, Anchoring on Historical Round Number Reference Points: Evidence from Durable Goods Resale Prices (February 26, 2022). Available at SSRN: https://ssrn.com/abstract=3653476 or http://dx.doi.org/10.2139/ssrn.3653476

Scott S. Wiltermuth

University of Southern California - Marshall School of Business ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Timothy Gubler (Contact Author)

Brigham Young University ( email )

Provo, UT 84602
United States

Lamar Pierce

Washington University, Saint Louis - John M. Olin School of Business ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5205 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
127
Abstract Views
873
rank
307,515
PlumX Metrics