The trouble with round numbers

Thursday, February 20, 2020 - 18:40 in Mathematics & Economics

Do you have a monthly car payment, or a similar loan? Is each payment a nice round number, like $300? If so, you are hardly alone. But the appeal of that easy-to-remember payment figure may be costing you money. That’s one implication of a new study co-authored by an MIT economist, which shows how much consumers prefer monthly payment figures that are multiples of $100 — indeed, the number of monthly consumer payments at dollar figures just above such multiples drops by 16 percent. That likely makes monthly budgeting easier for people to calculate. But as the study also shows, people select potentially unfavorable loan terms as a result. “People budget with these round numbers and are trained to think in these monthly payment terms, going for the smallest monthly payment possible,” says MIT economist Christopher Palmer, co-author of a newly published paper detailing the results. “In particular, people really bunch around...

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