Anchoring on Historical Reference Points: How Round Number Prices from the Past Shape Future Negotiation Outcomes
43 Pages Posted:
Date Written: July 16, 2020
People often strive to negotiate low prices for durable goods such a vehicles, homes, and appliances. In this quest they are influenced by psychologically salient reference points such as round number prices (e.g., $10,000). Although round numbers may generate very different purchasing behavior between nearly identical prices (e.g., $9,999 vs $10,000), existing theory does not capture how these price thresholds affect decision making in future negotiations. In this paper we provide a new implication of round-number prices based in the anchoring and adjustment bias—people paying a price just below a round number may sacrifice money because they receive disproportionately lower prices when subsequently reselling the good. An archival study using over 13,000 repeat residential real estate transactions and an experiment support these predictions. The anchoring effect of prior sales prices on subsequent home prices is discontinuous at $10,000 round number thresholds. Real estate buyers who previously paid an amount just under a $10,000 reference point subsequently sell their homes for $2,358 less on average than do buyers who paid at or just above this threshold. Importantly, we show that market mechanisms do not correct this bias, which causes economically significant market distortions. The significantly lower initial listing prices stemming from a prior sales price below a round number is not corrected through subsequent price negotiations and are observable through the final sales price. Finally, we show that these discontinuities are attenuated when sellers or buyers use experienced agents who might more accurately assess the home’s true value.
Keywords: Anchoring, Real Estate, Reference Points, Experience, Negotiations
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