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

Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments

Abstract. Past expenses have been shown to influence future spending behavior by depleting available budgets. However, a prerequisite for this relationship

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

Managing Mental Accounts: Payment Cards and Consumption Expenditures

Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously received a new credit 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.

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).

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.

Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretation

Abstract. Four experiments and one study were conducted to test the hypothesis that stimuli associated with spending can elicit spending responses. In all

Payment Rewards and Credit Card Debt: Experimental Evidence

We report on a controlled laboratory experiment in which participants make consumption, saving, and credit card repayment decisions when credit card purchases e

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.

The Red and the Black: Mental Accounting of Savings and Debt

In the standard economic account of consumer behavior the cost of a purchase takes the form of a reduction in future utility when expenditures that otherwise could have been made are forgone. The reality of consumer hedonics is different. When people make purchases, they often experience an immediate pain of paying, which can undermine the pleasure derived from consumption. The ticking of the taxi meter, for example, reduces one's pleasure from the ride. We propose a “double-entry” mental accounting theory that describes the nature of these reciprocal interactions between the pleasure of consumption and the pain of paying and draws out their implications for consumer behavior and hedonics. A central assumption of the model, which we call prospective accounting, is that consumption that has already been paid for can be enjoyed as if it were free and that the pain associated with payments made prior to consumption (but not after) is buffered by thoughts of the benefits that the payments will finance. Another important concept is coupling, which refers to the degree to which consumption calls to mind thoughts of payment, and vice versa. Some financing methods, such as credit cards, tend to weaken coupling, whereas others, such as cash payment, produce tight coupling. Our model makes a variety of predictions that are at variance with economic formulations. Contrary to the standard prediction that people will finance purchases to minimize the present value of payments, our model predicts strong debt aversion—that they should prefer to prepay for consumption or to get paid for work after it is performed. Such pay-before sequences confer hedonic benefits because consumption can be enjoyed without thinking about the need to pay for it in the future. Likewise, when paying beforehand, the pain of paying is mitigated by thoughts of future consumption benefits. Contrary to the economic prediction that consumers should prefer to pay, at the margin, for what they consume, our model predicts that consumers will find it less painful to pay for, and hence will prefer, flat-rate pricing schemes such as unlimited Internet access at a fixed monthly price, even if it involves paying more for the same usage. Other predictions concern spending patterns with cash, charge, or credit cards, and preferences for the earmarking of purchases. We test these predictions in a series of surveys and in a conjoint-like analysis that pitted our double-entry mental accounting model against a standard discounting formulation and another benchmark that did not incorporate hedonic interactions between consumption and payments. Our model provides a better fit of the data for 60% of the subjects; the discounting formulation provides a better fit for only 29% of the subjects (even when allowing for positive and negative discount rates). The pain of paying, we argue, plays an important role in consumer self-regulation, but is hedonically costly. From a hedonic perspective the ideal situation is one in which payments are tightly coupled to consumption (so that paying evokes thoughts about the benefits being financed) but consumption is decoupled from payments (so that consumption does not evoke thoughts about payment). From an efficiency perspective, however, it is important for consumers to be aware of what they are paying for consumption. This creates a tension between hedonic efficiency and what we call decision efficiency. Various institutional arrangements, such as financing of public parks through taxes or usage fees, play into this tradeoff. A producer developing a pricing structure for their product or service should be aware of these two conflicting objectives, and should try to devise a structure that reconciles them.

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.

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.

Perspectives on mental accounting: An exploration of budgeting and investing

This article provides an overview of recent advances in the literature on mental accounting within the context of consumer financial decision‐making. We first discuss the categorization process that underlies mental accounting and the methods people use to categorize funds. We then highlight some of the notable work that examines how mental accounting influences budgeting, spending, and investment decisions. The article concludes by proposing an agenda for future research, focusing on current gaps in our knowledge and promising areas to explore.

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.

The Impact of Payment Frequency on Consumer Spending and Subjective Wealth Perceptions

Abstract Payment frequency is a fundamental yet underexplored feature of consumers’ finances. As higher payment frequencies are becoming more prevalent, consumers are receiving more frequent yet smaller paychecks. An analysis of income and expenditure data of over 30,000 consumers from a financial services provider demonstrates a naturally occurring relationship between higher payment frequencies and increased spending. A series of lab studies support this finding, providing causal evidence that higher (vs. lower) payment frequencies increase spending. The effect of payment frequency on spending is driven by changes in consumers’ subjective wealth perceptions. Specifically, higher payment frequencies reduce consumers’ uncertainty in predicting whether they will have enough resources throughout a period, increasing their subjective wealth perceptions. As such, situational factors that reduce prediction uncertainty for those paid less frequently (e.g., the timing of consumers’ expenses, income levels) moderate the impact of payment frequency. The effects of payment frequency on subjective wealth and spending can occur even when objective wealth favors those with lower payment frequencies. More broadly, the current work underscores a need to understand how timing variations in consumers’ income impact their perceptions, behaviors, and general well-being.

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.

The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels, Not Sofas

Using transaction data from a sample of 1.8 million credit card accounts, we provide the first field test of a major prediction of Prelec and Loewenstein’s theory of mental accounting: that consumers will pay off expenditure on transient forms of consumption more quickly than expenditure on durables. According to the theory, this is because the pain of paying can be offset by the future anticipated pleasure of consumption only when money is spent on consumption that endures over time. Consistent with this prediction, we found that repayment of debt incurred for nondurable goods is an absolute 10% more likely than repayment of debt incurred for durable goods. The strength of this relationship is comparable to an increment in 15 percentage points in the credit card annualized percentage rate. Our results have not only managerial implications for the structuring of financial transactions (e.g., that credit card customers should be given the option of paying off specific purchases) but also more general implications for exploiting variations in the pain of paying in incentive schemes aimed at customers and employees. This paper was accepted by Yan Chen, behavioral economics.