Value is a tricky concept. It varies from person to person, the degree of need, availability, and presentation. We’d like to think that there are mostly honest companies, but we know from experience that it pays to do your homework before turning over any of your hard-earned cash. Did you know that no matter how savvy you think you are, you’ll be influenced right down to the numbers that come after the decimal point?
It’s true—how the actual price is represented has given people what is known as “left digit bias,” or the inability to remain partial when examining the numbers after the decimal point in a price. The actual difference in these last few cents is negligible, but it can result in an increase in the amount of money paid, especially on a loan.
An article published last month examined how this works in the real world. Analyzing information on 35 million car loans, left digit bias was seen on both the side of the purchaser and the car dealership. It’s almost an optical illusion, but auto loans that end in a 9 digit (such as $499.99) actually have a higher interest rate than loans which end in a 0 digit ($499.99 versus $500.00).
Auto loans ending in 0 are lower than those that end in 9. The difference between $499.99 and $500.00 is so slight, but it is seen as being larger than $1. Due to this, people think that any price ending in 9 is much less than prices ending in 0 ($499 is perceived as a better value than $500). This causes them to go for the loan ending in the 9 digit which has the higher interest rate!
This left digit bias accounts for an extra cost of $33 per payment on auto loans which quickly adds up over a 5-year period. It’s almost an extra $2,000.00; and left digit bias or not, we can all agree that’s a large figure we’d rather not pay needlessly!
Zhenling Jiang. An Empirical Bargaining Model with Left-Digit Bias: A Study on Auto Loan Monthly Payments. Management Science 0 (0) https://doi.org/10.1287/mnsc.2020.3923