Wednesday, November 5, 2014

Left-digit bias in the diamond market (or how to get your money's worth when buying a diamond)

Suppose your favourite cup of coffee costs $2.50, but its price rises to $3.00. Now suppose that the same cup of coffee costs $2.40, and its price increases by the same amount, 50 cents, to $2.90.

Many would feel more upset over the first scenario, even though the price increases by the same amount in both cases. The jump in the dollar digit, or the leftmost digit, makes it seem that the increase is greater. This is known as left-digit bias.

Does this occur in the diamond market? Suppose the weight of a diamond increases by 0.1 carats, from 0.49 to 0.5 carats. Call this Scenario A. Now, suppose the weight of a diamond increases from 0.5 to 0.51 carats. Call this Scenario B.

If there were left-digit bias, customers might perceive the quality difference in Scenario A to be larger than that in Scenario B. They would then be willing to pay more for the same 0.1 carat increase in Scenario A than that in Scenario B.

To study this, I used data from a local diamond retailer. The website was particularly useful because I could specify exactly what characteristics I wanted in the diamond - colour (F), clarity (VS1), cut (VG), symmetry (VG), polish (VG), and florescence (NON) - and hold these constant while I changed the carat of the diamond. I then recorded the price at 0.39, 0.4, 0.41, 0.49, 0.5, 0.51, etc. carats.

The results are shown below. As the first chart shows, upgrading from a 0.39 carat diamond to a 0.4 carat diamond would set you back by $370. However, the same 0.1 carat increase, from 0.4 to 0.41, costs only $38. Similar patterns are also seen for larger diamonds, as shown in the second chart.
Source: Diamond For You
On average, adding 0.1 carats to change the leftmost digit of the weight adds about 20% to the price of the diamond, but the next 0.1 carat increase only adds 1.7% to the price.

In conclusion, there is probably left-digit bias in how diamond weights are perceived, resulting in the price patterns shown above. Hence, f you are shopping around for a diamond, you might want to consider getting a diamond whose weight ends with "9" carats, e.g. 3.9 instead of 4.0 carats, to get the most diamond for your buck!

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