RESEARCH

Goldstein, D.G., Hershfield, H.E., & Benartzi, S. (2016). Journal of Marketing Research, 53, 804-813.

Research on choice architecture is now shaping policy around the world, touching on areas ranging from retirement economics to environmental issues. Recently, researchers and policy makers have started to pay more attention not just to choice architecture but also to information architecture: the format in which information is presented to people. Here, we investigate information architecture as it applies to consumption in retirement. Specifically, in four experiments, we examine how people react to lump sums versus equivalent streams of monthly income. Our primary question of interest is whether people exhibit an “illusion of wealth” by which a lump sum at retirement age (e.g., $100,000) seems larger than its monthly equivalent (e.g., $500 per month for life). We predict and test whether people exhibit the illusion of wealth as well as the opposite effect, by which lump sums seem smaller than their monthly equivalents. We conclude by discussing how format-dependent perceptions of wealth might drive retirees to claim social security benefits too early, avoid purchasing an annuity, or to cash out their defined benefit pensions.

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Hershfield, H.E.*, Sussman, A.B.*, O’Brien, R.L., & Bryan, C.J. (2015). Perspectives on Psychological Science, 10, 749-752.

U.S. consumers currently hold $880 billion in revolving debt, with a mean household credit card balance of approximately $6,000. Although economic factors play a role in this societal issue, it is clear that psychological forces also affect consumers' decisions to take on and maintain unmanageable debt balances. We examine three psychological barriers to the responsible use of credit and debt. We discuss the tendency for consumers to (a) make erroneous predictions about future spending habits, (b) rely too heavily on values presented on billing statements, and (c) categorize debt and saving into separate mental accounts. To overcome these obstacles, we urge policymakers to implement methods that facilitate better budgeting of future expenses, modify existing credit card statement disclosures, and allow consumers to easily apply government transfers (such as tax credits) to debt repayment. In doing so, we highlight minimal and inexpensive ways to remedy the debt problem.

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Tully, S.M., Hershfield, H.E., & Meyvis, T. (2015). Journal of Consumer Research, 42, 59-73.

Consumers with limited discretionary money face important trade-offs when decid- ing how to spend it. In the current research, we suggest that feelings of financial constraint increase consumers’ concern about the lasting utility of their purchases, which in turn increases their preference for material goods over experiences. The results of seven studies confirm that the consideration of financial constraints shifts consumers’ preferences toward material goods (rather than experiences), and that this systematic shift is due to an increased concern about the longevity of the purchase. This preference shift persists even when the material goods are more frivolous than the experiences, indicating that the effect is not driven by an increased desire for sensible and justifiable purchases. However, the shift toward material purchases disappears when the material purchase is unusually short lived, further implicating concern about longevity as the key driver of the effect. Finally, the consideration of financial constraints increases preference for material purchases even when the potential memories that experiences can provide are made explicitly salient. Together, these results indicate that financially constrained consumers spend their discretionary money on material purchases as a means of securing long-term consumption utility.

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Hershfield, H.E. & Roese, N.J. (2015). Journal of Consumer Psychology, 25, 15-27.

U.S. Federal regulation from 2009 requires credit card companies to convey information regarding payoff scenarios, i.e., details such as total amount paid and time to pay off when only a minimum payment is made (over time). Across seven studies, the present research shows that consumers who were given a dual payoff scenario (i.e., how much is paid in total based on the minimum payment and also based on a 3-year payoff window) on credit card statements recommended lower payments than those given a single payoff scenario (when the 3-year payment amount was less than what they would have paid otherwise), and were less likely to pay off the balance in full. The effect is driven by a tendency of consumers to infer that the 3-year payment amount is the most appropriate. The dual-scenario effect is minimized by an intervention that draws attention away from the 3-year payment amount. Theoretical and public policy implications are considered.

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