Posts Tagged ‘anchoring’

The psychology of pricing an M&A deal

May 26, 2009

The target company’s 52-week high exhibits a strong anchoring effect on merger and acquisition decisions, according to three economists in the working paper, “The Psychology of Pricing in Mergers and Acquisitions.” A Wall Street Journal article on the paper is gated. The full paper can be downloaded here. A summary is below:

The 52-week high stock price is widely available and represents a salient price level to investors and managers. Empirically, we show that the target’s 52-week high exercises a strong effect on the bidder’s offer price. A number of bidders offer exactly this price, demonstrating its unique salience. The effect is difficult to square with alternative explanations and appears best explained in terms of the use of the 52-week high as a reference point by the target’s shareholders or as an anchor in negotiations with the bidder.

Our evidence suggests that bidders’ shareholders view bids driven by the target’s 52-week high as overpaying: They react especially negatively to the component of the offer price driven by the target’s 52-week high. Most important, perhaps, is the fact that psychological pricing has real effects. Bids that exceed the 52-week high discontinuously increase the probability of deal success and thus the distribution of capital across firms’ alternative investment policies.

Behavioral economics tips for home sellers: How to price a house

May 14, 2008

Anchoring is one of the most common human biases. As an example (from Nudge), write down your phone number and add two hundred. Now answer when you think the Hun sacked Europe? In surveys, people’s answers differ by a few hundred years depending on whether they have a low or a high anchor.

Marketers have long been curious about how different prices affect customers’ ideas of a product’s value. In the February issue of Psychological Science, marketing professor Chris Janiszewski and research assistant Dan Uy of the University of Florida tackled the age old question of whether people are really fooled – or at least subconsciously nudged – by a price tag than ends with quirky .95 instead of a nice, round, even .00.

Continue reading the post here.