Mental accounting of product returns

The Exception Is the Rule: Underestimating and Overspending on Exceptional Expenses

Abstract Purchases fall along a continuum from ordinary (common or frequent) to exceptional (unusual or infrequent), with many of the largest expenses (e.g., electronics, celebrations) being the most exceptional. Across seven studies, we show that, while people are fairly adept at budgeting and predicting how much they will spend on ordinary items, they both underestimate their spending on exceptional purchases overall and overspend on each individual purchase. Based on the principles of mental accounting and choice bracketing, we show that this discrepancy arises in part because consumers categorize exceptional expenses too narrowly, construing each as a unique occurrence and consequently overspending across a series of discretely exceptional expenses. We conclude by proposing an intervention that diminishes this tendency by helping consumers consider their spending on exceptional items as part of a larger set of purchases.

Malleable Mental Accounting: The Effect of Flexibility on the Justification of Attractive Spending and Consumption Decisions

Mental accounts are often characterized as self‐control devices that consumers employ to prevent excess spending and consumption. However, under certain conditions of ambiguity, the mental accounting process is malleable; that is, consumers have flexibility in assigning expenses to different mental accounts. We demonstrate how consumers flexibly classify expenses, or construct accounts, to justify spending. An expense that can be assigned to more than one account (i.e., an ambiguous expense) is more likely to be incurred than an unambiguous expense that is constrained either by existing budgets or by previously constructed accounts. We explore the justification processes that underlie these results and their implications for mental accounts as self‐control devices.

Double Mental Discounting: When a Single Price Promotion Feels Twice as Nice

This research finds that when a single gain has strong associations with multiple costs, consumers often mentally deduct that gain from perceived costs multiple times. For example, with some price promotions (e.g., spend $200 now and receive a $50 gift card to spend in the future), consumers mentally deduct the value of the price promotion from the cost of the first purchase when they receive the promotion, as well as from the cost of the second purchase when they use the promotion. Multiple mental deductions based on a single gain result in consumers' perceptions that their costs are lower than they actually are, which can trigger higher expenditures. This mental accounting phenomenon, referred to as “double mental discounting,” is driven by the extent to which gains feel associated, or coupled, with multiple purchases. This article also documents methods to decouple promotional gains from purchases, thus mitigating double mental discounting.

A Model of Mental Accounting and Reference Price Adaptation

Consumers possess a mental account that stores the worth of items purchased and yet to be consumed. Reference prices act as the book values of these items. Movements in the account—the comparison between the reference price and the price paid at entry, and the comparison between the benefit of consumption and the reference price at exit—yield hedonic benefits. The reference price is determined by a psychological process of adaptation to the price evoked by the trade. The model is integrative in that it explains a wide array of observed anomalies such as sunk-cost effects, payment depreciation, reluctance to trade, preference for prepayment, and the flat-rate bias. The model also generates new testable implications. This paper was accepted by James Smith, decision analysis.

Gift Cards and Mental Accounting: Green‐lighting Hedonic Spending

ABSTRACT In three studies, we examine the mental accounting rules that govern how gift cards are used. We predicted that their identity as gift cards would shift consumption from utilitarian to hedonic goods even in contexts where both types of goods are available and the consumer's needs are unchanged. In Study 1a, participants were asked to imagine that they had both a gift card and a specified amount of cash and needed to purchase both a hedonic item and a utilitarian item. When asked which currency they would use to buy which item, respondents were significantly more likely to say they would use the gift card to buy the hedonic item. Study 1b replicated this result and found that it was tied to participants' beliefs how different types of money should be used. In Study 2, we found that participants who were required to spend a certain amount of their compensation in a laboratory store spent more on hedonic goods if their payment was in the form of a gift card. In Study 3, we analyzed transactions at a campus bookstore and found that shoppers tended to spend disproportionately on hedonic goods when using their gift cards than when making credit card purchases. Taken together, these studies indicate that people tend to assign the monetary value of a gift card to a hedonic mental account and spend it accordingly. Copyright © 2014 John Wiley & Sons, Ltd.

The Effects of Prior Spending on Future Spending Decisions: The Role of Acquisition Liabilities and Payments

Research in mental accounting shows that prior spending influences a consumer's decision to make a new spending decision (Heath and Soll 1996, Soman 2001). In particular, greater spending in a particular category reduces the likelihood of further spending in that category. In the present research, we decompose “spending” into two distinct episodes—the acquisition liability episode during which a purchase is made accompanied by a commitment to pay (e.g., using a credit card) and the payment episode during which the consumer's wealth actually gets depleted (e.g., paying the credit card bill). Using a controlled laboratory experiment and real world data from a group of consumers, we replicate earlier findings that prior spending influences a pending spending decision, but also show that the location of both the acquisition liability episode and the payment episode play a role. Our results contribute to an understanding of the dynamic mental accounting of acquisition liability and actual outflows.

Effects of mental accounting on purchase decision processes: A systematic review and research agenda

Abstract This paper aims to systematically analyze and synthesize the existing research published on mental accounting and purchase decision processes by conducting a systematic literature review. Specifically, the paper aims to answer the question: “What are the effects of mental accounting on purchase decision processes?” Therefore, it identified 110 papers which contribute to achieving the research objective and which were selected using the same data collection, data analysis, and quality standards. After reviewing the identified publications, the paper finds that the existing literature can be structured along four main themes impacting purchase decision‐making processes: (1) source of funds, (2) intended use of funds, (3) pricing, and (4) payments. The paper shows that for each of the four themes there are multiple mental accounting effects with an impact on for example willingness to pay, the experienced pain of paying or the ultimate purchase decision. Further, the paper identifies potential directions for future research in mental accounting, including the influence of product categories on mental accounting, flexibility in budget setting and its impact on mental accounting behavior, long‐term effects of mental budgeting on financial wealth, integration–segregation behavior in the context of pricing, the role of consumer characteristics on mental accounting behavior, and the impact of increased financial transparency through technology on mental accounting.

On the Mental Accounting of Restricted-Use Funds: How Gift Cards Change What People Purchase

Abstract. This article emphasizes the role of categorization in mental accounting and proposes that once a mental account is established, purchases that ar

Payment Depreciation: the Behavioral Effects of Temporally Separating Payments From Consumption

Abstract. Research suggests that individuals mentally track the costs and benefits of a consumer transaction for the purpose of reconciling those costs and

In-Store Spending Dynamics: How Budgets Invert Relative-Spending Patterns

Abstract The authors conduct four controlled lab experiments and one field study in a brick-and-mortar grocery store to demonstrate that relative spending—the price of the purchased item relative to the mean price of the product category—evolves nonlinearly and distinctly for budget and nonbudget shoppers. While the relative spending of budget shoppers evolves in a concave manner, the relative spending of nonbudget shoppers evolves inversely in a convex manner. Thus, budget (nonbudget) shoppers spend relatively more (less) in the middle than at the beginning and toward the end of their shopping trip. Mediation analyses confirm that the pain of paying experienced while shopping drives price salience, which then drives relative spending. Moreover, manipulating shoppers’ pain of paying, by altering the opportunity costs associated with their spending or drawing shoppers’ attention to their spending via real-time spending feedback, is shown to influence these spending patterns. The research offers theoretical contributions to the in-store decision-making, budgeting, and pain-of-paying literature and has important implications for marketing and promotion strategies in retail and mobile technology environments, as it suggests when a shopper may be more sensitive to price-related factors.

Context-Dependent Drivers of Discretionary Debt Decisions: Explaining Willingness to Borrow for Experiential Purchases

Abstract Mental accounting research suggests that consumers prefer borrowing for longer-lasting purchases in order to receive benefits from the purchases as they pay for them. In contrast, two sets of archival data and five lab studies show that consumers are more willing to borrow for experiential versus material purchases, even though experiential purchases tend to have a shorter physical duration. Further, framing the same purchase as more experiential than material increases willingness to borrow. This effect occurs because purchase timing is more important for experiential purchases—a function of consumers’ aversion to missing out on planned consumption. Thus, we moderate the proposed effect by varying whether the borrowing decision impacts planned consumption. Other differences between material and experiential purchases, such as scarcity or expected happiness, cannot similarly explain our results. Moreover, our conceptualization allows us to reconcile the apparent contradiction between the previous and current research by examining the relative impact of purchase-timing importance and payment-benefit duration matching in different contexts (i.e., “purchasing” and “source-of-funding” decisions).

Affording Disposal Control: The Effect of Circular Take-Back Programs on Psychological Ownership and Valuation

A circular economy is a “closed-loop” system designed so that products flow back into the production cycle after use. With many companies implementing take-back programs as part of their sustainability strategy, a fundamental shift in consumption has occurred, with consumers considering disposal during and even before purchase decision making. Eight experiments reveal that consumers indicate a greater willingness to pay for circular program products. An increase in psychological ownership underlies the difference in product valuation. Specifically, the additional disposal control uniquely afforded by circular products increases the capacity of circular take-back program products to evoke psychological ownership. The process explanation is directly tested through mediation. Experimentally manipulating antecedents of psychological ownership (i.e., disposal control and psychological ownership) provides further support for the conceptual framework.

Knowing When to Spend: Unintended Financial Consequences of Earmarking to Encourage Savings

Maintaining savings is an important financial goal. Yet there are times when savings should be spent, such as when people face unavoidable costs, and spending their savings allows them to avoid high interest rate debt. Existing behavioral research has focused on consumer decisions between savings and discretionary spending and has proposed interventions to promote savings in these contexts. However, when spending is not discretionary, such interventions could risk exacerbating a pattern found in economic research in which people borrow high interest rate debt while maintaining savings that earn low levels of interest. To examine how mental accounting interacts with considerations of personal responsibility and guilt to contribute to this pattern, this article explores whether people spend their savings when they need money most: during emergencies. Six studies reveal that people's tendency to preserve savings by borrowing from a high interest rate credit option varies as a function of the savings’ intended use. Paradoxically, people are most likely to turn to high interest rate credit with the belief that doing so is the responsible option.

Purchase Justifiability Drives Payment Choice: Consumers Pay with Card to Remember and Cash to Forget

AbstractAlthough consumers often have multiple payment methods at their fingertips, such as cash and credit/debit cards, prior research is silent on how consumers choose between them. We home in on a key element of purchase—purchase justifiability—that affects how consumers choose to pay. Analysis of 118,042 real-world purchases and six experiments reveals that when consumers are motivated to forget (vs. remember) a purchase because they see it as difficult (vs. easy) to justify, they have an increased preference to pay with cash (vs. card) because cards create a “paper/electronic trail” that aids memory retrieval. These payment preferences are strongest among consumers most likely to recall/track their card spending, and manifest only when card expenses are trackable. We reconcile our results with the classic effect of payment method on pain of paying and discuss implications for merchants and for financial institutions designing payment methods of the future.

Mental Budgeting and Consumer Decisions

Abstract. Consumers often set budgets for categories of expenses (e.g., entertainment) and track expenses against their budget. Because budgets cannot perf

Managing Mental Accounts: Payment Cards and Consumption Expenditures

Abstract Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously receive a new payment card, without requesting one. Using random variation in the time of receipt, we show that individuals temporarily increase total consumption expenditure by making purchases with the new card without reducing spending on the others. We do not observe a corresponding increase in indebtedness. Total consumption expenditure rises even for the least liquidity-constrained individuals. The evidence is consistent with consumers treating methods of payment as nonfungible budget categories, as suggested by models of mental accounting and narrow bracketing.