How quickly do people adjust to nominal changes?

by on July 9, 2011 at 5:19 pm in Economics, Uncategorized | Permalink

Eric Barker sends me this very interesting article:

Turkish monetary reform, which took effect in January 2005, introduced the New Turkish Lira (NTL) by deleting six zeros from the former currency, the Turkish Lira (TL). Two experiments investigated how the introduction of the NTL might affect price estimation. In the first, conducted in December 2004, 202 students were first presented with high or low anchor values and then estimated the average price of a “new Turkish mid-sized car” in different currencies (TL, NTL and Euro). Although anchoring bias was not significantly different across familiar (TL) and unfamiliar currencies (NTL and Euro), price estimates in Euro and NTL were significantly higher than those in TL. In the second experiment, carried out 6 months later, 212 adult consumers estimated the prices of 13 items in one of three currencies. For five items prices estimated in Euros were significantly higher than those expressed in either TL or NTL. However, there were no significant differences between TL and NTL, suggesting that Turkish consumers had quickly adapted. Such ease of adaptation is consistent with a rescaling hypothesis: when one or more zeros are dropped from a currency, consumers rescale all prices relatively quickly rather than relearn them selectively through gradual exposure.

It is much harder, I think, when the nominal change is either uncertain or not common knowledge or not distributed evenly across economic sectors.  In those alternative cases the signal extraction problem is multi-dimensional and not necessarily solved by a quick social conversation.  In other words, I would not expect all nominal adjustments to run so smoothly.  Still, this is a nice test of an old proposition from David Hume (and others).

 

1 Bernard Yomtov July 9, 2011 at 5:54 pm

It’s not clear why this is so interesting. It’s hardly surprising that people adjust easily to knocking off zeros. In fact, I’d guess that they adjusted before the NTL was introduced, simply ignoring the millions.

I recall that when I was in Italy before the euro, monetary amounts were often stated, at least orally, without the thousands. Could the same have been true in Turkey?

2 rg July 9, 2011 at 6:21 pm

I grew up with the old Imperial system of measurement first and as the Metric system was introduced, had to learn that. So about 40 years after this change, I still convert Metric to Imperial on almost everything or else the Metric value has little meaning to me. I understand that I should have taken a different approach and wholly adopted the new Metric system into my thinking. Many conversations with others indicate they never switched mentally to Metric either. Perhaps it does not help that in Canada we are so closely tied to the US.

3 COB July 9, 2011 at 6:57 pm

Would it make a difference I wonder if the change was the other way? i.e. multiplying the nominal value by one million.
This discussion on the bitcoin forums https://forum.bitcoin.org/index.php?topic=13144.0 made me think of this.
e.g. if something was priced at 0.00054 BTC or 540 μBTC would it make any difference?

4 TheCrankyProfessor July 9, 2011 at 9:51 pm

In Italy ( the only European country where I have a lot of experience) one still sees double pricing information for at least two things — cars and real estate. Folks have explained to me that this is because once doesn’t buy a car or a house/condominium very often, so one’s interior pricing understanding is anchored in a lifetime of experience.

I haven’t seen double-pricing in a supermarket or a general kind of shop since 2008 or so.

5 Rahul July 9, 2011 at 11:19 pm

What does Double pricing mean? A Euro and pre-Euro price?

Also, for the benefit of the ignorant, what’s the proposition by David Hume that Tyler refers to?

6 TheCrankyProfessor July 10, 2011 at 6:52 am

Yep – euros and lira. Newspaper advertisements and the ads in real estate rental and sales displays would list both prices.

During the actual conversion year banks handed out free tiny calculators that had the conversion value pre-set so that you could just punch in the number and see. For awhile I saw a lot of people carrying those around in markets. There was a pretty serious proposal in 2008 to go back to listing both prices on food.

7 Anthony July 10, 2011 at 2:36 am

In Spain (in 2006), houses were priced in Pesetas (and not Euros), but everything else was in Euros. I found it much easier to adapt to the Euro in 2006 than to Pounds in 1998 or a variety of currencies in 1984, as the Euro was effectively equal to the dollar in PPP terms, so no conversions were necessary.

While it’s a little difficult to repeat the Turkish natural experiment, there ought to be some data on the effects of the Euro conversion, where the change was (theoretically) purely nominal, but the conversion factors weren’t convenient numbers like 1000 or 1,000,000, or even 2 or 5. Another interesting lost experimental opportunity was the decimalisation of the Pound in the early 1970s, where only the nominal prices of low-priced items were affected – a 50-pound item was still 50 pounds, but 6/6 became 32½p.

8 agree July 10, 2011 at 3:25 am

the euro experiment should offer lots of convenient data points as the conversation rates were far from as simple as in Turkey. Incidentally, in some Indonesian restaurants they also drop the zeros, so rather than 120 000 for a meal, the menu says 120.

9 Ryan July 9, 2011 at 11:26 pm

Bernard Yomtov: When I was in Turkey in the late 90’s, people quoted prices (in English at least) as the number only. So in America, you might say “How much does that cost? – 3 dollars”. In Turkey you would have said “How much does that cost? – 5 million”.

10 Marcin July 10, 2011 at 4:31 am

Poland had a similar reform in the mid 90s where they knocked off 4 zeros. People were very quick to internalize the rule, but for a few years to come many would convert any price back to the old currency for it to have any meaning to them.

11 Eli Rabett July 10, 2011 at 11:30 am

Same thing happened in France when deGaulle brought in the new Franc. People were in the habit of knocking off a couple of zeros anyhow but you would see prices in both new and old

12 Nanoparticles July 11, 2011 at 6:53 am

Peoples changes themselves with system because its the need of time.The price value which decided by the govt opt earlier by the peoples because mostely times that is beneficial for the peoples.

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