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Consumer misestimations of small recurring changes vs. a single large lump sum

Author

Listed:
  • Kunter Gunasti

    (Washington State University)

  • Haipeng (Allan) Chen

    (University of Kentucky)

Abstract

Various decision contexts require the calculation of smaller recurring changes accumulated over time and their comparison to larger one-time changes (e.g., $100 periodic increase in monthly rent every year vs. a $1000 increase in rent at the end of 5 years). In both hypothetical and incentivized studies, we demonstrate an inaccuracy of estimations involving total cumulations of smaller recurring changes and single lump sums. We document this effect when individuals process increasing or decreasing changes in gains or losses (e.g., raises in wages or rent, discounts in membership fees). Importantly, these biases occur even when the changes are provided to the consumers as clear absolute dollar values as opposed to complex percentages. We discuss the theoretical contributions of our study as well as its implications for consumers, managers, and policy makers.

Suggested Citation

  • Kunter Gunasti & Haipeng (Allan) Chen, 2023. "Consumer misestimations of small recurring changes vs. a single large lump sum," Marketing Letters, Springer, vol. 34(4), pages 605-617, December.
    • Handle: RePEc:kap:mktlet:v:34:y:2023:i:4:d:10.1007_s11002-023-09669-4
    DOI: 10.1007/s11002-023-09669-4
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    References listed on IDEAS

    as
    1. Tsiros, Michael & Chen, Haipeng (Allan), 2017. "Convexity Neglect in Consumer Decision Making," Journal of Marketing Behavior, now publishers, vol. 2(4), pages 253-290, April.
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    4. Necati Ertekin & Jeffrey D. Shulman & Haipeng (Allan) Chen, 2019. "On the Profitability of Stacked Discounts: Identifying Revenue and Cost Effects of Discount Framing," Marketing Science, INFORMS, vol. 38(2), pages 317-342, March.
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    8. Haipeng (Allan) Chen & Akshay R. Rao, 2007. "When Two Plus Two Is Not Equal to Four: Errors in Processing Multiple Percentage Changes," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 34(3), pages 327-340, June.
    Full references (including those not matched with items on IDEAS)

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