Do You Know How To Calculate The Real Discount?

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.

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