How your brain tricks you when buying a car

Try this bit of arithmetic: you have 5 seconds (no more!) to make an estimate (you probably won’t have time to work it out). Ready? OK, what’s 1x2x3x4x5x6x7x8? And you’re answer was. . .

Well, whatever it was, you might be interested to know that, when lots of people are asked the same question, the average guesstimate is 512. Your own answer may have been higher of lower. But it doesn’t really matter, because here’s the interesting thing. If you’d been asked exactly the same question, but in reverse (that is, what’s 8x7x6x5x4x3x2x1), it’s extremely likely that your guesstimate would have been much higher. We know this because the average response, when the question is asked in this way, is 2,250.

Now, of course, the actual answer to both questions is the same (40,320). Yet there’s a huge difference between the average estimate, depending on how the question is asked. Why should this be the case?

The answer lies in something called the ‘anchoring effect’. This is a ‘cognitive bias’ (i.e. a non-rational brain process) that leads people to make quick estimates based on an initial ‘cue’, whether or not it makes sense to do so. In other words, the instant you see a number (the cue), it ‘primes’ your mind to think in terms of its size. And the bigger the ‘cue’ the bigger the final estimate. In this case, the initial cue in the first question is 1x2x3 (=6), which is much lower than the cue in the second question (8x7x6=336). So the second question leads to higher guesstimates than the first.

Anchoring was first proposed and proved by the Nobel Prize-winning economist Daniel Kahneman, and his colleague Amos Tversky, in 1974. It shows up in almost every aspect of life, in one way or another, and nowhere is it (deliberately) used to greater effect than in the retail market. That’s why you so often see a high price reduced to a lower one. The first price you see (the ‘Was’ price) acts as an anchor which sets your expectations for what the product is worth, so the reduced price seems good value. Usually, the product has never been on sale at the original price – it’s just been arbitrarily concocted to do it’s work as a cognitive bias.

In fact, anchoring plays a key role in pretty much all negotiation – especially in the new and used cars market. Let’s say, for example, you see a 2012 Audi A3 1.6 on sale for £5500. It’s perfect for your needs, but you have a maximum budget of of £5000. So you pop into the dealer, and they offer you the vehicle for £4900. You don’t think twice – you snap it up while the offer’s on the table. What you didn’t realise is that another dealer across town had a very similar vehicle for just £4500. You’ve been ‘suckered’ by the anchor effect – you fell for the reduction in price, not the price itself, which has little to do with the intrinsic value of the car.

But, common though it is, anchoring is far from the only cognitive bias that’s relevant to car buying. Take an effect called ‘Loss Aversion’, for example. It’s been shown by many studies in psychology that humans find the pain of losing about twice as powerful as the pleasure of winning. So, for instance, you’ll be about twice as upset at losing £10, as you’ll be happy at finding £10. The car industry exploits this phenomenon with high-pressure sales tactics such as: ”Buy now – offer ends today!” And insurance firms deploy the same logic – that people are willing to pay a premium to reduce the effect of possible future losses.

Or take Left-Digit Bias (LDB). Have you ever wondered why something is priced at £49.99 rather than £50.00? After all what difference can a penny make. Well, the answer is, not much. But that’s not the point. The point is that it’s the 4 and the 5 (the left digit) that influences our decision to buy. We emotionally attribute a full £10 of difference to the 1p on the price tag. The effect is often knowingly employed in used car sales. That’s why you should beware of the cost of vehicles with, say, 59,950 on the odometer – you may find that a similar vehicle with just over 60,000 on the clock is considerably cheaper. The seller knows that LDB will lead you to attribute disproportional value to the (very) slightly lower mileage.

And then there’s the Endowment Effect. In a famous US study, one half of a group of people were given a coffee mug, and asked what they would sell it for. The other half (those without mugs) were asked what they would buy the mugs for. The sellers averaged £5.25, while the buyers were only willing to pay £2.25 to £2.75. It’s typical buy-sell behaviour, widely recognised in the car industry. This is especially true with trade-ins - customers are much more focused on getting a good price for their current car than the new car. That’s why some dealers operate a deliberate strategy of pricing their existing stock above market levels so that they can subsidise what they can pay for a trade-in.

If the subject of cognitive biases interests you, we recommend you Google it – you’ll find several more which are worth knowing about when buying a car, as well as in general life. In the meantime, why not check out the DesperateSeller.co.uk used car section – you’ll find great value there, whatever you’re looking for, from a Renault Scenic to a Jaguar XF.