USA TODAY US Edition

How the brain computes numbers can help or hinder your business

Humans are good at estimation­s, bad at rounding

- Jeff Stibel Jeff Stibel is vice chairman of Dun & Bradstreet, a partner of Bryant Stibel and an entreprene­ur who also happens to be a brain scientist. He is the USA TODAY bestsellin­g author of “Breakpoint” and “Wired for Thought.” Follow him on Twitter at

Why did my doughnut cost 99 cents this morning instead of a simple, even dollar? It turns out that the price has less to do with cost or value and more to do with how our brains process numbers.

Our brains are good at some things but not others. We are terrible at crunching numbers, for example.

But we excel at quickly processing our environmen­t — for instance, if we see a long object moving on the ground, we don’t calculate its trajectory and motion. Instead, we just run — better to take the risk of embarrassm­ent (a twig on the ground) than risk being bitten by a snake.

To do this, our brains need to take in a relatively small amount of informatio­n and make up the rest using previous experience, expectatio­ns, and prediction­s.

YOUR BRAIN IS A CHEATER

The brain cheats, taking shortcuts and making snap judgments instead of carefully deliberati­ng the facts.

Most of the time, this is a good thing, because shortcuts are efficient and usually get you to the same place as the long way.

All business owners should consider experiment­ing with prices. Thanks to brain science, we now know that even a onecent change can make a big difference.

Consider using a number that the human brain is likely to round down to make your product appear to be a better value. As a consumer, just becoming aware of your brain’s shortcuts can make you a more careful buyer.

Numbers are an easy place for the brain to take a shortcut. We tend to be great at making estimation­s but horrible at rounding. When our brains see a price tag with lots of numbers, they automatica­lly estimate, so $4.99 ends up closer to $4 than $5; $66,999 becomes $66,000 or sometimes even $60,000. Psychologi­sts have known this for decades, and economists now begrudging­ly admit it as well.

PSYCHOLOGI­CAL FACTORS

Businesses have used pricing tricks for years to their advantage. They figured out by experiment­ation that tiny difference­s in pricing can make big difference­s in sales, and researcher­s studied this effect in depth in the 1990s and early 2000s.

They found that there is often a big sales difference between $2.99 and $3, but dropping a product’s price from $2.24 to $2.23 does not yield a measurable increase in sales. A penny is not always worth a penny.

Of course, there are other psychologi­cal factors at work in pric- ing. Relative pricing plays an important role: A product’s price compared to the products physically surroundin­g it can impact its sales.

That is why gas stations not only charge per gallon to the nine-tenths of a cent but also price match to the competitor across the street. The human brain is especially good at making either/or comparison­s and especially bad at decimals.

HOW SHOPPERS CAN PREVAIL

This strategy applies to shoppers as well. If you’re buying a 99cent doughnut, think $1. A penny probably won’t break your budget, but rounding bias becomes more important for a larger purchase. A $399,000 house is pretty much $400,000, but not in your mind: your brain’s shortcut system will try to suggest it’s closer to $300,000.

When the stakes are that high, don’t just think about it. Remember, our brains are better at thinking than “we” are and will continue to trick us!

To combat this, physically write down the price on a piece of paper, strike through it, and rewrite the appropriat­e number by rounding up. The best defense is always a strong offense.

 ?? EUROPEAN PRESSPHOTO AGENCY ?? Becoming aware of your brain’s shortcuts and the pricing tricks that businesses use can make you a more careful buyer.
EUROPEAN PRESSPHOTO AGENCY Becoming aware of your brain’s shortcuts and the pricing tricks that businesses use can make you a more careful buyer.

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