Two plus two doesnt always equal four, especially with discounts

When you are out for shopping and come across a sign that says - 20 per cent off the original price plus an additional 25 per cent off the already reduced sale price - you usually make the mistake of assuming the total discount to be 45 percent, when actually it is 40 per cent.

Washington, Sep 13 : When you are out for shopping and come across a sign that says - "20 per cent off the original price plus an additional 25 per cent off the already reduced sale price" - you usually make the mistake of assuming the total discount to be 45 percent, when actually it is 40 per cent.

That's what a new study titled, "When Two and Two is Not Equal to Four: Errors in Processing Multiple Percentage Changes," has explored. In the paper, Akshay R. Rao of University of Minnesota and Haipeng Chen of University of Miami have investigated why consumers frequently think a double discount is a better deal than a single discount of the same total magnitude.

The researchers have shown that consumers treat percentages like whole numbers, and this results in systematic errors in calculation.

"Retailers frequently use the strategy of double discounts for their regular promotions or to induce customers to open a credit card account with them. Such errors in peoples' judgments of the net effect of multiple price discounts . . . have implications for a variety of marketing settings including advertising, promotion, pricing, and public policy," the authors write.

Previous studies have shown that even math teachers frequently have trouble calculating percentages. In the first experiment, the researchers found that 59 percent of the respondents - students at a large university - inaccurately added the two percentages to calculate the overall discount. Only 26 percent of students got the answer right.

As not everyone was prone to the miscalculation effect, the researchers then sought to identify the situations that help counter calculation error. They first gave incentives to one group of participants, offering 2 dollars for correct answers. The results showed that after the monetary incentive, the rate of computational error was 26 percent, compared to 44 percent for students who were not offered money for correct answers.

Participants were also less prone to computational error when the problems were easier or the results seemingly illogical. Students presented with a base price of 100 dollars from which to calculate the double discount were less likely to make an error than students presented with a base price of 80 dollars.

Similarly, the researchers asked participants to calculate either a double percentage decrease of 70 percent and 45 percent or a price increase of the same percentages. Those who mistakenly added the figures in the decrease condition were confronted with a decrease of 115 percent, and were more likely to make errors than those confronted with a 115 percent increase.

"Since this computational error can potentially influence peoples' judgment in a variety of settings, the economic impact of such errors on consumer welfare may be substantial," the authors write.

The researchers also point to policy implications of computational error outside of consumer settings, such as when a 70 percent increase followed by a 60 percent decrease in state-wide test scores is considered positive, even though the net effect on test scores is a 32 percent decrease.

The study is published in the October issue of the Journal of Consumer Research.

ANI