The Homa Files

TakeAway: The human brain has difficulty interpreting the number 0 according to new research.

This difficulty can lead to irrational decisions when it comes to choosing a credit cards with 0% interest rates.

Retailers offering credit cards will be happy to take advantage of this.

* * * * *

Excerpted from Wall Street Journal, “When 1% is more appealing than 0%,” by Mary Pilon, November 17, 2010

As retailers ramp up their holiday sales pitches, they may be playing off some surprising and counterintuitive ways our brains interpret numbers.

For example: what’s more confusing: A credit card with a 1% interest rate or a card with a 0% interest rate?

Even though 0% is better, we might be lured toward the 1% card … When it comes to advertising “zero,” consumers get baffled. …

… The “principle of diminishing sensitivity” makes the perceived difference between two quantities decrease as both increase by the same amount. He offers up the example that the difference between 10 and 20 is perceived as larger than the difference between 110 and 120, even though in both cases, the numbers are still only 10 apart.

Enter the number zero.

“Zero is a special value that prevents consumers from using relative comparisons when making decisions.” Because zero makes us lose our reference point when we compare it to other values. …

Let’s say you’re offered a credit card with a 25% interest rate. Then, say you’re offered a credit card with a 1% interest rate. You may think, according to the theory, “Wow, that’s 25 times as high of an interest rate!” The gap seems huge.

But then, let’s say you’re offered a credit card with a 25% interest rate and another interest rate of 0%. The zero makes us lose our bearings when it comes to determining the gap between the two, even though we know that the 0% is less than the 1% and even further away from 25%.

According to research cited in the paper, when no reference point was cited, 49% of survey participants chose a card with a 0% interest rate, while 73% chose a card with a 1% interest rate even though that rate is clearly less advantageous in the long run. …

Edit by DMG

* * * * *

Full Article
http://blogs.wsj.com/economics/2010/11/17/when-1-is-more-appealing-than-0/

* * * * *

This entry was posted on November 23, 2010 at 6:13 am and is filed under Mktg - Consumer Behavior. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.