The Free Money Finance blog posted and interesting piece on how we don’t know how to calculate the best discount when offered with a choice of getting more of a product or getting the product for less (full post here).
If you are given a 20% discount on a product or a 20% increase in quantity, which would you take? Research shows that most people would say there is no difference. But let’s do the math: If you have a $10 product and get a 20% discount, the unit price is now $8. Now if you get a 20% extra, you have 1.2 products for $10, which means the unit price is $8.33. That is about 4.1% more expensive!
This mistake is IMHO also done by investors everywhere: if you had a stock that yesterday went down 5% and today went up 5%, it went back to its original price, right? wrong! if a stock was $100 yesterday and went down 5% it now costs $95. Now it goes up 5% (of $95, which is $4.75) and now costs $99.75. Small but real difference. And if your stock went down 50% it doesn’t have to go up 50% to go back to its original value… It has to rise 100% of its current value.
And that is a very big difference.