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When Two Plus Two Is Not Equal to Four: Errors in Processing Multiple Percentage Changes

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  • Haipeng (Allan) Chen
  • Akshay R. Rao
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    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. (c) 2007 by JOURNAL OF CONSUMER RESEARCH, Inc..

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    File URL: http://www.journals.uchicago.edu/doi/pdf/10.1086/518531
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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Consumer Research.

    Volume (Year): 34 (2007)
    Issue (Month): 3 (06)
    Pages: 327-340

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    Handle: RePEc:ucp:jconrs:v:34:y:2007:i:3:p:327-340

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    Web page: http://www.journals.uchicago.edu/JCR/

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    Cited by:
    1. Lusardi, Annamaria & Tufano, Peter, 2009. "Debt literacy, financial experiences, and overindebtedness," CFS Working Paper Series 2009/08, Center for Financial Studies (CFS).
    2. Franses, Ph.H.B.F. & Vlam, A., 2011. "Financial innumeracy," Econometric Institute Research Papers EI 2011-01, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    3. Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker, 2012. "Hidden Skewness," Discussion Papers of DIW Berlin 1238, DIW Berlin, German Institute for Economic Research.
    4. Ludwig Ensthaler & Olga Nottmeyer & Georg Weizsäcker & Christian Zankiewicz, 2013. "Hidden Skewness: On the Difficulty of Multiplicative Compounding under Random Shocks," Discussion Papers of DIW Berlin 1337, DIW Berlin, German Institute for Economic Research.
    5. Franses, Ph.H.B.F. & Vlam, A., 2011. ""Borrowing money costs money": Yes, but why not tell how much?," Econometric Institute Research Papers EI 2011-02, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    6. Li, Meng & Chapman, Gretchen B., 2013. "A big fish or a small pond? Framing effects in percentages," Organizational Behavior and Human Decision Processes, Elsevier, vol. 122(2), pages 190-199.
    7. Annamaria Lusardi, 2012. "Numeracy, financial literacy, and financial decision-making," NBER Working Papers 17821, National Bureau of Economic Research, Inc.

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