How is round-number bias affecting your decision making

The psychology of pricing is not based on rigorous economic reasoning and is not usually included in ‘Market Insights’. But through discussions with AuctionsPlus users about current cattle prices, the idea that an EYCI starting with a 6 is much cheaper than an EYCI in the 700’s was raised. And while it is correct, the sentiment behind the price change was much more significant than the price change itself.

Humans have a round number bias, passed onto us by socialization since the base-10 number system was chosen. This shows up in psychological pricing when $19.99 is used to appear significantly cheaper than $20. There is no confirmed reason for this but there are suggestions that because we read left to right, we overweight digits on the left of the price. Round numbers ending in 0 are easy to remember and perform calculations with, while they also carry the sentiment of a new ‘level’.

On further analysis of historical cattle prices, a trend of prices sometimes pausing momentarily around each 100-cent mark can be seen. Suggesting that buyers and sellers had short-term reactions to prices ticking over or under to a new hundred. As if prices just became significantly more expensive or cheaper even though the actual changes were no different. This may only occur over a week but would suggest producers stepping in and making buying and selling decisions based on the first digit in the EYCI. 

Figure 1: Eastern States Young Cattle Indicator March 2022 - March 2023. Source: NLRS. 

For example, a drop from 750c to 740c is a solid fall of 10c, but a fall from 705c to 695c feels like we have entered a new level of pricing. This may inspire buyers to step into the market and make purchases as the market has reached levels deemed ‘cheap’. Likewise, a rise from 910c to 930c appears normal, particularly in late 2021. But a jump from 985c to 1005c may inspire producers with market-ready cattle to sell as the prices are deemed to be very high. The burst of supply temporarily reduces competition and holds prices from increasing further.

Figure 2: Eastern States Young Cattle Indicator March 2022 - March 2023. Source: NLRS.

Round number bias is not backed by scientific findings or economic reasoning and does not always show up in daily changes of the EYCI, but it is important to consider how it might be affecting your decision making next time you are buying or selling livestock.