Round Up

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This is a small thing, and so this will be a small post.

Learn to set your expectations right.

When you buying something and see a price like $19, $19.95, or $19.99, think $20.

When you are buying a car, and see prices like $19,000, $19,900, $19,990, or $19,999, think $20,000.  The same thing applies to homes, and be sure you have a strong estimate of all of the extra taxes and fees that will get thrown into the price.

People tend to look at the front number(s) and get mesmerized.  Learn to round it up as a buyer.  We tend to get too quick in our judgments, and be too optimistic when we buy, so round prices up — especially true if you are on a budget, and you are keeping a running total of costs.

Now, if you think this doesn’t happen in institutional pricing, it happens there as well.  I remember cases where I was trying to sell bonds, and I could not get a deal done, I would ask my sales coverage, “Why? How is the other side pricing the bond?”  If it was a dollar price like $100, I would make a note of it, and if the market fell for general reasons under that price, I would make an offer a little under the price, say $99.95.  Frequently, I would sell the bonds for my client, even if the yield spread had worsened in relative terms, and the bonds were less attractive to a more rational buyer.  The same applied to other means of pricing bonds, and applied the opposite way if I was trying to buy bonds.  You would be surprised how many were looking for a shiny price like $105, and after a general rally deals would get done at $105.01.

Buffett has sometimes had a phrase, “Your price, my terms.”  If there are other facets to the deal than merely price, try giving the other guy his price in a prominent way, with other terms that favor what you want to achieve.

You would think that people would be more rational, but they are often not, and you and I aren’t much better.  That is why I encourage you to think conservatively in your economic decisions to avoid undue optimism.

PS — remember that this happens with institutional investors in setting target prices as well — they like the glossy round numbers.