Anchoring on Historical Reference Points: How and When Round-Number Price Thresholds Distort the Relationship Between Current and Previous Home Prices

Buyers often strive to negotiate low prices for durable goods, such as vehicles, homes, appliances, or art. Psychologically-salient round number reference points (e.g., $10,000) influence these purchasing decisions. However, existing research does not capture how these round-number reference points from the past influence the anchoring effect of previous sales prices on future resale valuations. We argue that the anchoring effect of prior sales prices on subsequent prices of durable goods is discontinuous at round numbers, such that it matters disproportionately whether a previous sales price reached a round-number threshold. Buyers paying a price just below a round number may sacrifice money because they receive disproportionately less when reselling the good. We use data on over 13,000 repeat residential real estate transactions and an approach similar to a regression discontinuity design to find that real estate buyers who previously paid an amount just under a $10,000 reference point subsequently list and sell their homes for about 1.3 percent (over $2000) less on average than do buyers selling comparable homes who previously paid at or above this threshold. This drop is in addition to the expected price based on home characteristics and the general relationship between previous and current sales prices. A laboratory experiment with 1010 participants increases confidence in causality. We also find that market mechanisms and the negotiation process do not correct for these discontinuities: Lower initial listing prices carry through to final sales prices. However, we find strong evidence suggesting that using a highly-experienced agent attenuates these effects.