Special Session Summary the Consumer Psychology of Rates

John Gourville, Harvard Business School
[ to cite ]:
John Gourville (2003) ,"Special Session Summary the Consumer Psychology of Rates", in NA - Advances in Consumer Research Volume 30, eds. Punam Anand Keller and Dennis W. Rook, Valdosta, GA : Association for Consumer Research, Pages: 106-108.

Advances in Consumer Research Volume 30, 2003     Pages 106-108

SPECIAL SESSION SUMMARY

THE CONSUMER PSYCHOLOGY OF RATES

John Gourville, Harvard Business School

* A cereal manufacturer faces increased costs. Is it better off raising price 5% and keeping package size constant or decreasing package size proportionately and keeping price constant?

* A vacationer is traveling to Southeast Asia for the first time. Are they more likely to spend money when the local currency is a multiple or a fraction of their home currency?

* A health agency seeks to change risky behavior. Is it better off quoting disease rates as infections per day or infections per year?

These scenarios challenge the normative principle of descriptive invariance (Tversky, Sattath, and Slovic 1988), which holds that preferences should be invariant across different presentations of the same stimuli (in this case, numerical rates). Yet, there is growing evidence that consumers are sensitive to the manner in which rate-based information is presented. Work by Koehler and Macci (2002) shows that a mock juror’s assessment of guilt can be influenced by the manner in which numerical evidentiary data is communicated (e.g., 0.1 in 100 vs. 1 in 1000). Work by Gourville (1998) shows that an individual is more likely to donate to a cause when that donation is framed as "$1 a day" as opposed to "$365 per year." Finally, we are routinely presented with data framed so as to elicit surprise or shock, as when we are told, "someone dies in a traffic accident every 13 minutes" as opposed to "40,000 people die per year." Importantly, these systematic effects occur even though the underlying statistic (e.g., guilt, donation, total deaths) remains unchanged across framings.

In this session, we explore some manifestations and causes of these violations of descriptive invariance. In domains ranging from the pricing of consumer packaged goods, to the spending of foreign currency, to the communication of disease rates, we show that an individual’s assessment of rate-based statistics often violate standard theories of normative decision making in systematic and predictable ways. In the process, we begin to offer a framework for the "consumer psychology of rates."

In the first paper, Gourville and Koehler explore the effectiveness of "downsizing price increases," an increasingly common pricing strategy which entails a decrease in package size in lieu of an increase in posted price. In two real-world data sets, they present evidence that downsizing is an effective strategy for increasing the effective price of a product. Counter to normative rules, this effectiveness suggests that consumers are more sensitive to changes in price than changes in quantity. To help explain this finding, they present two laboratory studies that indicate that (for the product categories tested) consumers "categorically" evaluate the quantity purchased. For instance, they evaluate the price of cereal "per box," the price of bread "per loaf," and the price of coffee "per container." As a result, they are quite sensitive to price, but much less exacting when it comes to quantity contained within a box, loaf, or container.

In the second paper, Raghubir and Srivastava investigate the spending effects of foreign currencies. Holding real prices constant, they predict that a consumers systematically under-spend or over-spend depending on whether the face value of a foreign currency is a multiple or a fraction of one’s home currency. Across a series of studies, they find support for such a relationship. Further, they find that factors (such as familiarity with the foreign currency) moderate but do not eliminate this effect.

In the third and final paper, Chandran and Menon study the effects of temporal framing on risk perception. In contexts ranging from gun deaths to radiation risk to infectious diseases, they predict and find that the near-term (e.g., per day) versus distant framing (per year) of the very same risk systematically impacts risk perceptions, attitudes toward the hazard, and behavioral responses. To explain these findings, they argue that a near-term framing (e.g., per day) increases the immediacy and magnitude of the risk, relative to a distant framing (e.g., per year). Across three experiments, they find consistent support for this explanation.

Together, these three papers serve to highlight the impact of rate-based information on everyday consumer choices. They demonstrate that seemingly simple changes in the way rate-based information is presented can influence factors ranging from perceptions of cost to immediacy of risk. While each papers looks at the effects of rate-based processing from a different angle, together they begin to tell a compelling story about the "consumer psychology of rates." In the process, the papers (individually and collectively) make a strong theoretical contribution to consumer research. Not only does each of the papers identify a new phenomenon, but also each goes a long way toward explaining that phenomenon. All are in the late stages of empirical work and all have well-developed theoretical frameworks. Having both theoretical and practical implications, we believe that this session should have fairly broad appeal, proving especially interesting for researchers in the areas of pricing, consumer decision making, and information processing.

 

INDIVIDUAL PAPER ABSTRACT - S

DOWNSIZING PRICE INCREASES: A DIFFERENTIAL SENSITIVITY TO PRICE OVER QUANTITY

John Gourville, Harvard Business School

Jay Koehler, University of Texas at Austin

As the cost of goods increase, manufacturers and retailers routinely pass these costs onto consumers. Usually, this has meant a straight price increaseCa gallon of milk that costs $1.99 one year may cost $2.49 the next. A less obvious, but increasingly common, strategy is to "downsize"Cto maintain the sticker price, but to reduce the size of the product. Thus, a can of coffee shrinks from 1 pound to 13 ounces over time, while potato chips that cost $2.99 for 16 ounces one month costs $2.99 for 14 ounces the next. Our research addresses why and when this strategy will be effective.

To explain the (possible) effectiveness of downsizing, we propose that for many transactions, consumers "categorically" evaluate the quantity purchased. For instance, they evaluate the price of cereal "per box," the price of bread "per loaf," and the price of coffee "per container." As a result, they are quite sensitive to price, but much less exacting when it comes to quantity contained within a "box" or a "loaf."

From the perspective of the manufacturer, we find support for this contention. In one study, using price and quantity data for four brands of breakfast cereal in a northeast supermarket, we find that variance in quantity (measured in ounces or servings) was 2 to 4 times greater than variance in price. In a second study, using longitudinal data from a large snack food provider, we find a systematic strategy by the manufacturer to periodically reduce quantity in lieu of increasing price. Further, by comparing the market place response to these periodic quantity reductions to the marketplace response to straight price increases, we show that consumers are more sensitive to the latter. Both studies indicate that manufacturers view consumers as more sensitive to price than quantity. The second study suggests that this view is well placed.

At the level of the consumer, we find added support for the differential sensitivity to price over quantity in two laboratory studies. In one study, we find that consumers believe that downsizing will increase sales relative to a price increase because the former makes products "seem cheaper." In a second study, designed to test our argument for categorical processing, we presented subjects with a request to pledge money to a walkathon. We varied the length of the walkathon (10 vs. 25 miles) and whether the request was framed as a "per-mile donation" or a "total donation." We found that pledges in the "total donation" condition were insensitive to the length of the walkathon (at about $8) and that pledges in the "per mile" condition also were insensitive to length (at about 604 per mile). But insensitivity in the latter condition meant that the aggregate pledge for these subjects was more than 2 times greater at 25 miles than at 10 miles. It appears that individuals have a strong concept of a fair "total donation" and a fair "per-mile" donation, but are insensitive to the quantity (i.e., miles) over which that donation is allocated.

Moving forward, we continue to explore reasons behind this differential sensitivity to price over quantity. Potential explanations include a lack of awareness (e.g., I didn’t realize that there was a quantity decrease), a lack of a mathematical ability (e.g., a 5% price increase is thought to be bigger than a 5% quantity decrease), and or proposed "categorical" evaluation of the quantity purchased.

 

EFFECT OF FACE VALUE ON PRODUCT VALUATION IN FOREIGN CURRENCIES

Priya Raghubir, University of California at Berkeley

Joydeep Srivastava, University of Maryland

This paper examines how the face value of a foreign currency and exchange rate affects people’s willingness to pay for a product and their purchase intentions for a product with a stated price. Although economic transactions can be represented in either nominal or real terms, Shafir, Diamond, and Tversky’s (1997) money illusion suggests that people think predominantly in terms of nominal rather than real values. Using the money illusion effect as a starting point, we use an anchoring and adjustment process to describe how people use foreign money. Since the most accessible and salient piece of informationBface valueBis used as an initial input, the subjective value of a product (V), in home currency terms, is initially equated to the nominal value (Vn) of the product in the foreign currency (FCY): V=Vn=FCY. Given an exchange rate (r), the initial price of the product stated in terms of the face value of the foreign currency will be adjusted based on the exchange rate to arrive at the real value (Vr) in home currency terms. However, as is typical, the adjustment required to reflect the prevalent exchange rate is likely to be inadequate. With complete normative adjustment: V=Vr=FCY/ r. Although people are aware of the distinction between nominal and real values, the anchoring and adjustment process suggests that their judgments are some combination of nominal and real values, with a bias towards nominal values because nominal representations are relatively simpler and more salient. We thus propose a simple model where a is between 0 and 1, inclusive:

V=aVn + (1Ba)Vr=aFCY + (1Ba) (FCY/ r)

The use of the face value suggests that a>0, implying over-weighting of the nominal value relative to the normative value (a=0). The inadequate exchange rate adjustment implies (1Ba)<1 (normative value=1). For one unit of FCY, Vr=1/r, and V=a + (1Ba)/r. By definition when r>1, the bias, (VrBV)<0 or Vr<V. When Vr<V, one unit of FCY seems more than what it is worth in normative terms, which is likely to lead to under-spending. Study 1 tests this hypothesis. On the other hand, when r<1, (VrBV)>0 or Vr>V, one unit of FCY seems less than what it is worth, which is likely to lead to overspending. Studies 2 to 4 examine the effect of r<1 and r>1 on people’s propensity to spend. While the value of r, whether it is greater than or less than 1, affects the direction of the bias, the strength of the bias is contingent on the value of a. As a->0, the bias reduces. Studies 5 and 6 discuss the factors that affect a.

Study 1 demonstrates the face value effect and shows that people systematically spend less in currencies as a unit of the home currency equates to a larger face value denomination (e.g., 1 US$=1100 Korean Won=24,500 Romanian Leu). Study 2 reverses the under-spending effect for currencies where a unit of the home currency equates to a fractional face value denomination (e.g., 1 US$=.4 Bahraini Dinars for US residents). Studies 3 and 4 systematically rule out alternative explanations and demonstrate the robustness of the face value effect across exchange rate presentation frames and across countries and currencies, respectively. Arguably, the face value effect is due to the accessibility and perceptual salience of the face value of the foreign currency. Theoretically, the strength and persistence of the face value effect should depend on the extent to which an individual has the opportunity to process exchange rate information and/or has experience in using a specific foreign currency. The last two studies show that the opportunity to process exchange information (study 5) and experience with a foreign currencyBboth measured (study 5) and manipulated (study 6) moderate the face value effect.

The results clearly highlight the main theoretical principle underlying our findings: although people are aware of the distinction between nominal and real values, their judgments are biased towards the nominal values. As such, our investigation extends the money illusion effect to the domain of foreign currencies. Arguably, reliance on nominal representations is due to the ease and relative salience of nominal versus real values rather than being strategic or motivational in nature (Shafir et al. 1997). Our results demonstrate that the strength and persistence of this bias towards nominal values depends on the ability and the experience of the decision maker. The findings suggest that the effect of face value on judgment may have an automatic component that respondents find difficult to control. Consistent with an interpretation of an automatic process, the strong and robust effect is only attenuated for those with relatively more experience and ability.

From a consumer welfare perspective, our results suggest that individuals are prone to systematic biases in spending foreign money even when they are cognizant of the exchange rate. To the extent that these effects occur outside of conscious awareness, individuals may be unaware that they are paying too much or too little which may potentially result in foregone opportunities. The findings provide evidence of automaticity in a sequential anchoring and adjustment process where one uses an automatic input and then engages in controlled processing. Importantly, our results indicate that ability and experience-related factors may moderate the face value effect. To the extent there is a tendency to convert an unfamiliar foreign currency in familiar home currency terms, factors that reduce the ambiguity in the conversion process should reduce the face value bias.

 

WHEN AM I AT RISK: NOW OR NOW? THE EFFECTS OF TEMPORAL FRAMING ON PERCEPTIONS OF HEALTH RISKS

Sucharita Chandran, New York University

Geeta Menon, New York University

"440,000 American succumb each year to the deadly effects of tobacco smoke."

"What will it take to get the 3,000 teenagers who each day start smoking to resist this deadly addiction?"

"A study by researchers at the University of California at San Francisco revealed that in movies in the 1990s, tobacco was used about once every 3 to 5 minutes."

Consider these excerpts from recent articles in The New York Times. Increasingly, we are presented with statistics that frame risky behavior or the occurrence of a disease in terms of a temporal period (e.g., every day, every year, etc.). Do consumers draw different inferences from these statistics depending on the time frame in which they are presented? For instance, if The New York Times article had said, "1,206 Americans succumb each day to the deadly effects of tobacco smoke," would we draw different conclusions about the risks of smoking? In this research we explore risk perceptions, attitudes toward the health hazard, and behavioral intention when the risky behavior/health hazard is framed as a 'daily’ versus a 'yearly’ statistic. We predict that a risk seems more immediate when an "every day" frame is used, because it connotes a near-term threat, whereas an "every year" frame connotes a more distant threat.

Research on temporal distance has demonstrated repeatedly that the value of an outcome typically decreases over time and that a negative outcome undergoes steeper discounting than a positive outcome. It has also been suggested that individuals sometimes bring the future into the present through the creation of images, self-knowledge, and expectations. They imagine outcomes they would like to achieve and those that they would like to avoid. The imagined outcomes, in turn, drive current behavior. In this paper, we argue that framing risks (e.g., death from lung cancer, radiation from cell phone usage, accidents from reckless driving) in temporal reference periods can cause individuals to view that risk either as immediate and urgent (in the "every day" condition) or less-pressing and delayed (in the "every year" condition).

In Study 1, we show that the framing of a health-related statistic (e.g., death from smoking, risk of a traffic accident) as occurring every day (short temporal frame) versus every year (long temporal frame) heightens perceptions of risk and raises behavioral intentions to practice corrective/preventive behavior. We posit that this occurs because of the power of the "day" frame to increase awareness of the threat, to make that threat appear more intense, and to magnify focus on its potential detrimental consequences. In the next two studies, we replicate this result and identify contextual factors that interact with the temporal frame.

In Study 2, we presented subjects with statistics regarding the hazards of radiation emitted by cellular phones. We then explore the interaction between temporal distance the tactical versus strategic nature of any corrective/preventive behavior. Temporal Construal Theory finds that an action is evaluated differently at different points in a time continuum. An action is evaluated primarily for its desirability (which is strategic in nature) when the temporal distance between the point of decision and the point of intended action is large. But, an action is evaluated primarily for its feasibility (which is tactical in nature) when that distance is small. In keeping with this thinking, we find that a "day" frame triggers tactical behaviors that are easy to perform and have immediate, but limited, consequences. In contrast, a "year" frame triggers strategic behaviors, which are more difficult to perform, but have longer-term impacts and a greater ability to reduce risk.

Finally, in Study 3, we investigated the potential interaction of the temporal framing of a disease with the "approach" versus "avoidance" regulatory framing of the message about the risky behavior that leads to that disease. In the context of mononucleosis, we either told subjects that they would increase the risk of Mono by kissing someone infected with the disease (approach framing) or decrease the risk by avoiding kissing someone with the disease (avoidance framing). Further, we manipulated the temporal framing of the disease as either a risk "per day" or a risk "per year." We predicted and found a significant temporal frame (day vs. year) by regulatory frame (approach vs. avoidance) interaction, wherein the perception of risk, attitude toward the disease, etc. was highest in the "day" by "approach" condition. Specifically, both the daily framing of the risk and the approach framing of the corrective action served to highlight the intensity and urgency of the disease. We conclude with a discussion of the implication of our results both from a theoretical standpoint and in terms of public policy.

REFERENCES

Gourville, John T. (1998), "Pennies-a-Day: The Effect of Temporal Reframing on Transaction Evaluation," Journal of Consumer Research, 24 (March), 395-408.

Koehler Jonathan J. and Laura Macchi (1999), "Thinking About Low Probability Events: An Exemplar Cueing Theory," University of Texas-Austin working paper.

Shafir, Diamond, and Tversky (1997), "Money Illusion," The Quarterly Journal of Economics," 102 (2), 341-374.

Tversky, Amos, Shmuel Sattath and Paul Slovic (1988), "Contingent Weighting in Judgment and Choice," Psychological Review, 95 (3), 371-384.

----------------------------------------