Anchoring on Historical Round Number Reference Points: Expert Experience Corrects for Pricing Bias while Market Forces Do Not

52 Pages Posted: 19 Aug 2020 Last revised: 8 Apr 2021

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: April 7, 2021

Abstract

Buyers typically strive to negotiate low prices for durable goods. Psychologically-salient round number reference points (e.g., $10,000) influence these purchasing decisions. However, existing research does not capture how these historical reference points influence the anchoring effect of previous sales prices on future valuations. We argue that the anchoring effect of prior sales prices on subsequent prices is discontinuous at round numbers, such that it matters disproportionately whether a previous sales price reached a round-number threshold. Buyers paying a price just below a round number may sacrifice money because they receive disproportionately less when reselling the good. We further argue that while market forces are unlikely to attenuate this effect, highly-experienced professional intermediaries may. Using data on over 13,000 repeat real estate transactions, we find that home buyers who previously paid just under a $10,000 reference point subsequently list and sell their homes for about 1.3 percent (over $2000) less on average than do 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. Buyers who cross a $10,000 threshold by paying $1000 more therefore would earn a return of 215%. An experiment with 1010 participants replicates these findings and increases confidence in causality. Market mechanisms, the negotiation process, and organizational support provided to intermediaries does not correct substantively for these discontinuities: Lower initial listing prices persist to final sales prices. However, using a highly-experienced agent attenuates 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: Expert Experience Corrects for Pricing Bias while Market Forces Do Not (April 7, 2021). 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)

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