Psychological Processes in Financial Decision-Making: a Consumer Perspective

Session Chair: Eric M. Eisenstein, Johnson School of Management, Cornell University
Discussion Leader: Stephen J. Hoch, Wharton School, University of Pennsylvania

Psychological Processes in Financial Decision-making: a Consumer Perspective


Intuitive Compounding:  Framing, Temporal Perspective, and Expertise

Eric Eisenstein, Cornell University

Stephen J. Hoch, the Wharton School, University of Pennsylvania


Many important financial decisions hinge on a proper understanding of compound interest.  In three experiments, we explored the psychological underpinnings of consumer estimation of compound interest.  Specifically, we examined the effects of negative vs. positive framing (i.e., debt vs. investments), differences between retrospective and prospective compounding, and the effects of financial expertise on accuracy.  Results revealed that most people anchor on simple interest, resulting in enormous errors.  A small subset of very accurate subjects used the “rule of 72.”  A short training procedure debiased consumers by teaching the rule of 72.  These results have consequences for major financial decisions.


Choosing for the Long Run: Making Tradeoffs in Multi-period Borrowing

Suzanne Shu, SMU Cox School of Business


This paper extends the research on intertemporal choice by asking how attributes other than discount rates influence multi-period borrowing decisions. Both normative and behavioral models of intertemporal choice have assumed that consumer choices are driven by an individual discount rate. However, I hypothesize that consumers often choose between loans in a way that is inconsistent with both the normative economic and behavioral models of discounting. A set of three studies is presented that examine choices between loan payment schedules to determine whether people are attending to interest rates or to other attributes when choosing between loans.


Investors Can’t Choose Their Fund and Feel Good, Too

Katherine Burson, University of Michigan

Simona Botti, Cornell University


Perceptions of relative skill are important when consumers decide if they can make their own choices or if they need expert assistance. We explore the effects of outcome (positive or negative) and agent (self or expert) on perceptions of relative ability and satisfaction. We find that the expert is rated as more able when the outcome is good and less able when the outcome is bad: Expert’s choice outcomes are scrutinized more than the choice process.  When choices are made for oneself, however, the outcome does not matter: Participants rate their ability the same no matter what the choice outcome.
[ to cite ]:
Session Chair: Eric M. Eisenstein and Discussion Leader: Stephen J. Hoch (2006) ,"Psychological Processes in Financial Decision-Making: a Consumer Perspective", in NA - Advances in Consumer Research Volume 33, eds. Connie Pechmann and Linda Price, Duluth, MN : Association for Consumer Research, Pages: 403-406.