When Two Plus Two Is Not Equal to Four: Errors in Processing Multiple Percentage Changes
Haipeng (Allan) Chen, Akshay R. Rao
Journal of Consumer Research · 2007 · Volume 34 · Issue 3
Abstract
When evaluating the net impact of a series of percentage changes, we predict that consumers may employ a “whole number” computational strategy that yields a systematic error in their calculation. We report on three studies conducted to examine this issue. In the first study we identify the computational error and demonstrate its consequences. In a second study, we identify several theoretically driven boundary conditions for the observed phenomenon. Finally we demonstrate in a real-world retail setting that, consistent with our premise, sequential percentage discounts generate more purchasers, sales, revenue, and profit than the economically equivalent single percentage discount.
Keywords
Behavioral Decision Theory, Judgment and Decision Making, Pricing, Promotions (Sales, Coupons), Experimental Design and Analysis (ANOVA)
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