JOHN G. LYNCH JR.?

Introduction to the Journal ofMarketingResearchSpecial Interdisciplinary IssueonConsumerFinancialDecisionMaking

Consumer welfare is strongly affected by householdfinancial decisions, both large and small. Consumers choosehouses and mortgages, save for college education or retire-ment, invest in their own human capital development to pro-vide a stream of financial benefits over time, use credit cardsto fund current consumption, decide which debts to pay firstand how much to pay on each, invest to achieve higherwealth at greater risk, pay for insurance to reduce risk, andpay for health care. In all these domains, consumers areoften poorly informed and susceptible to making seriouserrors that have great personal and societal consequences.Basic research from many social science and business dis-ciplines can enhance our understanding of how consumersactually make such decisions and how consumers can behelped to make better decisions through innovations in pub-lic policy, business, and consumer education.This special interdisciplinary issue of Journal of Mar-

keting Research was funded by a grant from the RussellSage Foundation and the Alfred P. Sloan Foundation undera program that supports behavioral research on consumerfinance by economists and finance scholars (for a review ofthis stream of work, see Tufano 2009). Coeditors ShlomoBenartzi, Stefano DellaVigna, George Loewenstein, and Iproposed this special issue to solicit work from a broaderset of disciplines studying these topics and to get schol-ars with different skills but common substantive intereststo join in conversation.We were pleased that the submitted papers and those ulti-

mately accepted for publication came from such a rich mixof disciplines. We were equally pleased with the emerg-ing interest in these topics by marketing scholars. Included

*John G. Lynch Jr. is Ted Anderson Professor and Director of theCenter for Research on Consumer Financial Decision Making, Univer-sity of Colorado–Boulder (e-mail: john.g.lynch@colorado.edu). Alongwith Guest Coeditors Shlomo Benartzi, George Loewenstein, and StefanoDellaVigna, he thanks the Alfred P. Sloan Foundation and Russell SageFoundation for making the special issue possible. The guest editors thankthe team of special issue associate editors and reviewers, Managing Edi-tors Sam Battan, Marco Alvarado, and Chris Bartone, and JMR EditorTulin Erdem for their support.

in the special issue are articles from scholars in psychol-ogy, economics, behavioral science, communication, man-agement, finance, and marketing. Of the 14 articles, 8 haveone or more coauthors from outside marketing, often work-ing in collaboration with marketing scholars. This pattern isquite different from a typical issue of Journal of MarketingResearch. We hope this special issue leads to significantcross-fertilization across fields and, therefore, to articles ofparticularly high impact.

THE DOMAIN OF CONSUMER FINANCIALDECISION-MAKING RESEARCH

The emerging field of consumer financial decision mak-ing has fuzzy boundaries. Although it could be arguedthat any purchase is a “financial decision” (e.g., whena consumer searches for a lower price), I do not sharethat expansive view. Decisions are “financial” only inso-far as they have dramatic effects on a consumer’s overallfinancial picture due to the size of a single expenditure(Himmelstein et al. 2009) or the accumulated effects ofrepeating the same pattern due to personal traits, abilities,and habits (Lynch et al. 2010; Soll, Keeney, and Larrick2011; Spiller 2011). Decisions are also “financial” whenconsumers choose financial products to enhance financialwell-being (Thaler and Benartzi 2004).Consumer financial decision making is marked by a

focus on a particular set of core decisions that readers willfind reflected in the articles in the special issue:

•Spending patterns and resource allocation for small items andbig-ticket expenses, such as health care (Schwartz, Luce, andAriely; Sussman and Olivola; Wilcox, Block, and Eisenstein);•Borrowing and repaying (Amar, Ariely, Ayal, Cryder, andRick; Bolton, Bloom, and Cohen; Navarro-Martinez, Salis-bury, Lemon, Stewart, Matthews, and Harris);•Saving (Hershfield, Goldstein, Sharpe, Fox, Yeykelis,Carstensen, and Bailenson; McKenzie and Liersch; Somanand Cheema) and investing (Galak, Small, and Stephen;Herzenstein, Sonenshein, and Dholakia; Lee and Andrade;Strahilevitz, Odean, and Barber); and•Purchase of complex financial products (Guarav, Cole, andTobacman).

In addition, certain core concepts are particularly rele-vant in financial decisions:

© 2011, American Marketing AssociationISSN: 0022-2437 (print), 1547-7193 (electronic) Si

Journal of Marketing ResearchVol. XLVIII (Special Issue 2011), Si–SvSiv

•Nonlinear reasoning due to compound interest (McKenzie andLiersch; see also Stango and Zinman 2009);•The intertemporal trade-off in consumption between smaller,sooner and larger, later rewards (Hershfield et al.; Soman andCheema; Wilcox, Block, and Eisenstein);•The role of advisers and influence agents who may be eitherself-interested or motivated to help the consumer (Bolton,Bloom, and Cohen; Gaurav, Cole, and Tobacman; Schwartz,Luce, and Ariely), and similar uncertainty by financial ser-vice providers about the truthfulness of potential customers(Herzenstein, Sonenshein, and Dholakia);•The role of emotion versus purely cognitive reasoning (Galak,Small, and Stephen; Lee and Andrade; Strahilevitz, Odean,and Barber; Sussman and Olivola); and•Framing (Amar et al.; Soman and Cheema).

Research on consumer financial decision making oftenhas a more substantive focus than behavioral work that typ-ically appears in journals, such as JMR, Journal of Con-sumer Research, and Journal of Consumer Psychology.Research often focuses on particular classes of remediesintended to help consumers make better decisions, such asthe following:

•Education (Bolton, Bloom, and Cohen; Gaurav, Cole, andTobacman; McKenzie and Liersch),•Information disclosures (Navarro-Martinez et al.), and•Defaults and other forms of choice architecture (Amar et al.;Hershfield et al.; Navarro-Martinez et al.; Soman and Cheema;see also Madrian and Shea 2001; Thaler and Sunstein 2008).

In what follows are brief summaries of the articles in thespecial issue. The articles are organized around the substan-tive topics of saving, debt repayment and credit (mis)use,spending patterns, emotional influences on investing, andthe role of advisers in financial decisions.

SAVING

Nonlinear reasoning is critical to both borrowing andsaving decisions because of the effect of compound interest.In their study, McKenzie and Liersch ask respondents toimagine two people of the same age beginning their careerswith a plan to retire in 40 years. Alan deposits $100 everymonth into his retirement account, and Bill waits 20 yearsto start but then deposits $300 every month. If the annualreturn is 10% for both, which one will have more moneysaved in 40 years at the time of retirement? Most peo-ple think that Bill will have more money, but in actualityAlan will have more than twice as much. McKenzie andLiersch show that people make this mistake because theyexpect cumulative savings to grow linearly (with contri-butions) rather than exponentially, ignoring the effects ofinterest on interest. This is an important finding becausemistaken extrapolation leads people to underestimate thecost of waiting to save. Importantly, this bias is independentof the ability to explain the concept of compound inter-est. Although people drastically underestimate how muchwealth they will amass if they save at a certain rate, show-ing them the (higher) projected exponential growth makesthem more motivated to save than to cut back.Soman and Cheema consider the problem of how to

increase savings by poor, unbanked laborers in India. Ina 14-week field experiment, workers received a portion oftheir weekly wages in sealed envelopes earmarked for sav-ings (Zelizer 1994). Before the intervention, 90% had been

saving less than 2% of their weekly earnings. A socialworker provided financial counseling to families of labor-ers on a government infrastructure project and encour-aged them to set a savings goal of either 4% or 8%. Thesocial worker gave laborers wages allocated for savingseither in one sealed envelope or partitioned into two sealedenvelopes; envelopes were either plain or adorned with pic-tures of the laborers’ children. As the authors predict, thelaborers saved more when given their earmarked savings intwo envelopes rather than one, presumably because parti-tioning stops a “what-the-hell” run on spending when dip-ping into the first sealed envelope. This effect was moredramatic in cases in which guilt over dipping into the sav-ings was magnified by putting pictures of the laborers’ chil-dren on the savings envelopes.Hershfield et al. test the conjecture that people fail

to save for retirement because they lack a connectionwith their future selves (Bartels and Rips 2010; Ersner-Hershfield et al. 2009). The authors present respondentswith a hypothetical resource allocation tasks in which theycould allocate a windfall to buy something nice for someonespecial, invest in a retirement fund, plan a fun extrava-gant occasion, or put it into a checking account after expo-sure to a virtual reality avatar of their current selves or anage-progressed avatar of themselves. The authors find thatrespondents allocated more to retirement after exposure totheir age-progressed avatar. In subsequent studies, this effectextended to behavior in incentive-compatible and hypothet-ical tasks, and similar effects were obtained using techno-logically inexpensive websites that age-progressed people’suploaded pictures.

DEBT REPAYMENT AND USE OF CREDIT

When spending exceeds income, consumers incur debt.Several articles in the special issue pertain to mistakes con-sumers are prone to make in managing debt and credit.Amar et al. show that people have “debt account aver-

sion”; that is, when people have debt in multiple accounts,they tend to pay off the smallest debt first because doing sofeels like they are making progress in settling debts. How-ever, the normatively optimal behavior is to pay off debtscarrying the highest interest rates first. The authors showthat real consumers carrying debt on multiple credit cardsallocate a higher proportion of their monthly paymentsto the account with the smallest balance. In experimentswith an incentive-compatible debt management game, peo-ple pay off smaller debts earlier even when they carrylower interest rates. However, if cash available to pay offdebts is insufficient to pay off the small but low-interestdebt, people behave more optimally. The authors show thatpeople are more successful at reducing their debts overtime if those debts are rolled into one “debt consolida-tion” account, even though in this condition the interest ratecharged was slightly higher than the weighted average ofthe interest rates in the control condition.Debt consolidation loans are appealing in the short run

because they roll a set of unsecured loans into a singlesecured loan, perhaps with a slightly lower interest rate butwith a much longer repayment period. Critics charge thatthe result is much larger total interest payments over thelife of the loan and no less debt after several years thanbefore the remedy was sought.

Introduction to the Special Issue Sv

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Bolton, Bloom, and Cohen note that for-profit firmsaggressively market “debt relief,” which encourages thenegative financial behaviors that got consumers into troublein the first place. They investigate the forms of financial lit-eracy education that can protect consumers. Prior researchhas considered relatively mathematical aspects of financialliteracy (Lusardi and Mitchell 2007). Bolton, Bloom, andCohen show the benefits of a combination of two kinds ofinterventions: “Loan-focused literacy” helps debtors under-stand how loans work, and “lender-focused literacy” helpsthem understand lender self-interest and imparts a form ofpersuasion knowledge (Campbell and Kirmani 2000). Theauthors expose consumers to debt consolidation loan admessages, followed by loan-focused explanations of howloans work, lender-focused education about the motives oflenders, both, or neither. They find across a set of measuresthat only the combination promotes healthy behaviors andappropriate coping. That is, it is not enough to be skepticalof lender motives without understanding how loans work,nor is it enough to understand how loans work withoutunderstanding the marketplace motives of sellers. A sec-ond study exposes consumers to one-sided debt consolida-tion loan advertisements. Subsequent education about basicfinancial numeracy had perverse effects, but when com-bined with loan and lender literacy education, that samefinancial numeracy education reduced the appeal of theadvertised loans by those initially most attracted. This find-ing fills an important gap in the literature on why financialeducation efforts often show weak effects.Navarro-Martinez et al. study the effects of minimum

required payment information on consumer debt repaymentdecisions. Stewart (2009) reports research with U.K. con-sumers showing that people repay less when a minimumpayment is specified than without any specified minimum,because of anchoring on the low number listed on thebill. Navarro-Martinez et al. replicate this finding with U.S.consumers. They note that lenders would not agree to astatement with no minimum, so they investigate the effectsof varying the level of the minimum. They find that theeffects of doing so depend on individual differences inwhether people tend to pay the minimum. Increasing min-imum repayments may cause those who tend to pay theminimum to pay more but those who do not have this ten-dency to be unaffected or pay less. The authors then testfor similar effects with real repayment behavior by cus-tomers of U.K. credit card companies. They find a mostlypositive association between minimum payment levels andactual repayment, modeling how the minimum level affectsthe mixture of consumers repaying in full, making par-tial repayment greater than the minimum, and repaying theminimum or less. They tentatively conclude that increasingthe required minimum payment would have positive effectson the repayment behavior of most consumers.

SPENDING PATTERNS

Wilcox, Block, and Eisenstein investigate the effects ofcredit card debt and available credit on spending, ratherthan on repayment behavior as in the two prior articles.They find that when consumers are carrying a balance ontheir credit cards, the higher their level of self-control, themore they spend when given an opportunity in a real auc-tion. The authors attribute this surprising finding to the

“what-the-hell” effect of goal violation. Reducing the psy-chological impact of the balance by increasing availablecredit mitigates these effects. People high in self-controlmay have trouble avoiding unwanted behaviors in spend-ing, and ironically, these are the people most likely to per-ceive failure from carrying a balance that compels them tospend more.Sussman and Olivola continue the theme of psycholog-

ical influences on spending behavior. They focus on howdifferences in the taxes paid when choosing particular alter-natives influence choices. They find that people give greaterweight to a tax of a certain amount than a nontax costof equal monetary value. That is, people are more will-ing to travel to a store to avoid taxes than for a sale withgreater nontax savings, and they are more willing to standin line longer to save on taxes than to save an equivalentnontax amount. These preferences also affected investmentbehaviors, perhaps explaining the paradox of why peoplein low tax brackets exhibit such interest in tax-free munic-ipal bonds. People differ in how painful they find payingtaxes, and those with political affiliations to antitax partiesare the ones most repelled by taxes.

EMOTIONAL AND “IRRATIONAL” INFLUENCESON INVESTING

Strahilevitz, Odean, and Barber show another way thatemotional reactions affect investing behavior. Normatively,the past performance of a stock does not predict its futureperformance, but the authors show with real brokerage datathat investors are unwilling to repurchase stocks they pre-viously sold at a loss or stocks they sold that subsequentlyappreciated in value. In addition, they are willing to repur-chase stocks that previously led to positive emotions butnot those that led to regret and disappointment.Lee and Andrade investigate the effects of incidental fear

on the trading behavior of online investors. They find thatin experiments with multiple decision rounds, fearful par-ticipants sell their assets earlier than the controls. Theydemonstrate that fearful people project that others are fear-ful as well; thus, expecting these other people to sell, fear-ful people also sell.An emerging area for investment is microfinance, in

which people lend small sums of money to others. Suchinvesting likely reflects a mix of motivations, includingprosocial motivations similar to those inspiring charitablegiving and motivations to gain by making profitable invest-ments. Two articles in the special issue investigate microfi-nance decision making.Galak, Small, and Stephen examine transactions on

Kiva—on which people make small loans to small busi-nesses and entrepreneurs in developing countries. Priorwork on charitable giving supports the notion of an “iden-tifiable victim effect”—that is, more giving to individu-als than to small or large groups with a similar needbecause more emotional reaction is sparked by empathyfor the individual. The authors code characteristics of Kivaloans and borrowers and find preferential lending to smallerrather than larger groups of borrowers. They also show thatinvestors prefer to lend to borrowers who are similar tothemselves.Herzenstein, Sonenshein, and Dholakia analyze the

narratives that Prosper.com borrowers create to explainwhy lenders should lend their money. Borrowers tend to

Introduction to the Special Issue Svii

make claims that are unverifiable “cheap talk”—rationally,investors should ignore this information because borrowersincur no costs for making false claims. The authors findhowever that certain classes of narrative claims are associ-ated with a higher likelihood of funding. With data on loanrepayment behavior, the authors find that use of more cat-egories of claims increases the chances that a loan will befunded but decreases the chances that it will be repaid. Theyshow that it is not just the number of claims but also theircontent that matter. Claims to be trustworthy or successfulpredict higher rates of funding but do not predict loan per-formance, whereas claims to be moral predict repaymentand economic hardship claims predict failure to repay.

THE ROLE OF FINANCIAL ADVISERS

Gaurav, Cole, and Tobacman report large-scale random-ized field experiments on the uptake of an innovative finan-cial product: rainfall insurance for poor farmers in India.The complexity of the product and its credence nature hadcontributed to low uptake. The authors invited half thefarmers in the sample to a financial education session bya nongovernmental organization, in which various financialconcepts, including insurance, were explained in an interac-tive way; the other half did not receive this invitation. Theauthors cross this manipulation of financial education withthe presence or absence of several other marketing inter-ventions offered in the context of a marketing visit after aweek’s delay. They find that attending the financial educa-tion session doubled uptake from 8% to 16%. Of the othermarketing interventions, a money-back guarantee was theonly successful one. Although the authors find a beneficialeffect of advice by a source that did not stand to benefitfrom a sale, the cost of the financial education exceededthe premiums paid, highlighting the challenges of creatinga market for a product geared to enhance social welfare.The positive effect of the training likely came from the

trust the farmers had in an expert and independent source.Schwartz, Luce, and Ariely examine the dark side of trustfor expert advisers in the context of the critical financialdecision of paying for health care. Health care providersare often paid per procedure, creating an inherent conflictof interest. They may profit from patients who follow theiradvice to choose a costly treatment option over anothercheaper option that may be just as effective. The authorsshow that patients who trust their health care provider aremore reluctant to solicit second opinions. This reluctanceincreases the cost of health care without improving qualityby making consumers more likely to accept the expert’sadvice to use a more costly procedure. The authors investi-gate the case of dental work for crowns and fillings. Here,cosmetically more attractive porcelain and resin materi-als are less durable and more prone to failure than silveror gold in back teeth that are not visible to others. Theauthors find that when controlling for dentists’ base rates ofusing the different materials, patients with longer relation-ship tenure receive the more costly material more often andthen incur higher expenses for repairs later. The authorsalso report lab experiments that show that people wouldnot seek a second opinion in circumstances in which theywould advise a coworker to seek one and that unwilling-ness to seek a second opinion is influenced by the dentist’sgranting of personal favors.

CONCLUSION

Consumers’ basic financial equation involves generatingfinancial resources and spending them wisely by allocatingthem in accordance with long-term priorities and opportu-nity costs (Katona 1974; Spiller 2011). Any imbalance ofthe rate of generating income and spending it in a particu-lar period produces savings or debt. Financial instrumentsenable people to spend “beyond their means” in the presentor live “beneath their means” by saving and investing sothat more resources are available to fund future consump-tion. Financial products can also reduce risk in terms of theresources people will have available for future consump-tion. These instruments can enhance consumer welfare, butfew people are sufficiently sophisticated to avoid conse-quential mistakes.At any given time, consumers are focused on some small

part of the overall financial picture but do not appreciateall the interdependencies. Their decisions are influenced bya fascinating set of individual traits and skills, situationalfactors, and social motives. Public policy makers, employ-ers, and self-interested sellers are all in the mix nudging,informing, and persuading. Researchers who undertake thetask of unpacking and explaining these consumer finan-cial decisions will be rewarded with unusual intellectualstimulation of learning from colleagues in adjacent disci-plines. They will discover that their substantively orientedwork truly matters to many audiences in academia, busi-ness, and society.

John G. Lynch Jr.University of Colorado–Boulder

Guest Editor in Chief

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