2+2=What?

Math is fundamental to software development, right? Which means that software developers are good at math. Agreed? So the following math challenge, devised by Haipeng Chen of the University of Miami and Akshay Rao of the University of Minnesota, should be a piece of cake for software developers:

You're walking by a store and see a sign that says, 20% off the original price plus an additional 25% off the already reduced sale price. So how much is the discount?

According to Chen and Rao, most consumers often mistakenly think the total discount is 45% off the original price when, in fact, the true discount is 40%.

"Retailers frequently use the strategy of double discounts for their regular promotions or to induce customers to open a credit card account with them. Such errors in peoples' judgments of the net effect of multiple price discounts...have implications for a variety of marketing settings including advertising, promotion, pricing, and public policy," say Chen and Rao in their article When Two and Two is Not Equal to Four: Errors in Processing Multiple Percentage Changes, published in the Journal of Consumer Research.

Previous studies have shown that even math teachers often have trouble calculating percentages. In the first experiment, the researchers found that 59% of the respondents erroneously added the two percentages to calculate the overall discount. Only 26% got the answer right. They didn't say anything about software developers, however.

"Since this computational error can potentially influence peoples' judgment in a variety of settings, the economic impact of such errors on consumer welfare may be substantial," Chen and Rao go on to say. They also point to policy implications of computational error outside of consumer settings, such as when a 70% increase followed by a 60% decrease in statewide test scores is considered positive, even though the net effect on test scores is a 32% decrease.

-- Jonathan Erickson
jerickson@ddj.com

Posted by Jon Erickson at 11:08 AM  Permalink