More accurate crowdfunding targets increase confidence and reduce sense of risk, finds Vesa Pursiainen

Human instinct tends to favour round numbers, a phenomenon that has been observed in retail pricing, stock market trades and corporate takeovers. This makes sense due to our base-10 numerical system. However, this instinct can also lead to over-reliance on, and disproportionate use of, round numbers.

Why does this matter? For a start, crowdfunding campaigns with a round goal amount are significantly less likely to succeed. For example, Kickstarter campaigns with a goal amount of $5,000 have a historical average success rate of 38 per cent, compared with 49 per cent for those with goals between $4,000 and $4,999 and 44 per cent for those with goals between $5,001 and $6,000. Given that there is also evidence suggesting individuals with higher IQ levels are less likely to use round numbers, it’s conceivable these results are influenced by the quality of the entrepreneur.

On top of this, campaign goal amounts are intended to be a relatively accurate forecast of a project’s financing needs, so there’s no practical reason amounts should cluster at round numbers. Campaign backers have a sense of this, and therefore might interpret round-number campaign goals as evidence of inaccurate forecasting or, worse, as proof of an entrepreneur’s lack of experience, information or ability.

Of course, one cannot say any of these things will be conclusively true for any particular campaign, but the practical effect is campaign backers who do their research will be aware of an entrepreneur’s use of round number goals, and will use that information to make predictions about the current campaign. If they find evidence of current or past use of round number goals, it does little to inspire confidence, with campaign backers less likely to support the entrepreneur as a result.

What can entrepreneurs do to avoid these pitfalls? The most advisable course of action is to be precise. More accurate figures, which are statistically unlikely to be round numbers, suggest entrepreneurs have confidence in their claims, and have taken into account real project costs and demand estimates, which reduces uncertainty and the sense of risk. Campaign backers are also aware entrepreneurs learn from their experience, with the likelihood of setting a round campaign goal declining with each subsequent campaign by a particular entrepreneur.

Risk is a function of probability, and campaign backers are aware the likelihood of a crowdfunding campaign being driven by a focused team with a good track record and a higher chance of success increases when non-round campaign goals have been set by that team in the past. For this reason alone, savvy entrepreneurs should make every effort to avoid the round-number heuristic, with its too-neat figures and abundance of zeros, and instead stand out from the crowd with accurate, specific targets.

The full version of this article can be found on IB Knowledge.