Special Session Summary Closing the Deal: How Consumers Finance, Account For and Complete Marketplace Transactions


Dilip Soman (2000) ,"Special Session Summary Closing the Deal: How Consumers Finance, Account For and Complete Marketplace Transactions", in NA - Advances in Consumer Research Volume 27, eds. Stephen J. Hoch and Robert J. Meyer, Provo, UT : Association for Consumer Research, Pages: 42-43.

Advances in Consumer Research Volume 27, 2000      Pages 42-43



Dilip Soman, Hong Kong University of Science and Technology

Research in consumer behavior and judgment and decision making has traditionally studied events leading to consumer choices between a number of product alternatives and the decision to purchase. Specifically, consumer behavior researchers have studied consumer needs and wants, consumer search behavior as well as consumer decision making processes (commonly referred to as "choice rules", Payne, Bettman and Johnson 1993). Some recent work has also started examining consumer decision making beyond the point of purchase, e.g. research on consumption (e.g. Gourville and Soman 1998; Wansink 1996), maintenance (Meyer 1998) and "possessiveness" behavior (Strahelivitz and Loewenstein 1998).

However, the growing bodies of research on consumer behavior prior to purchase and beyond the point of purchase still leave unexplored a promising avenue for research on how consumers actually "close a deal" and make a purchase. While some research has studied consumer-purchasing behavior in retail environments, there are several other factors that come into play especially when consumers make purchases for non-routine items. Specifically, consumers first need to allocate funds for the purchase of the product. Second, consumers typically have to mentally account for the transaction in order to evaluate its attractiveness. And third, they may be called upon to determine their willingness-to-pay for a product or service and hence to evaluate the attractiveness of the transaction while closing the deal. The four papers in this special session addressed the important (and understudied) issues of how consumers finance their purchases, how they mentally account for them and how they evaluatethe transaction in order to close a deal and complete the transaction.

In the first paper ("Always Leave Home Without It"), Drazen Prelec and Duncan Simester discussed the effects of payment mechanism on spending behavior. In an experimental procedure in which they randomly assign subjects to conditions in which they are required to pay for transactions either by cash or by credit cards, they showed that the average willingness-to-pay is significantly greater in the credit card conditions than in the cash conditions (a "credit card premium"). Further, they presented evidence to suggest that these differences between the two payment mechanisms cannot be fully attributed to mere liquidity constraints. Their work joins a growing body of research in marketing (e.g. Feinberg 1986, Soman 1999) that suggests that the payment mechanism used to evaluate a potential purchase can influence the attractiveness of the transaction, the decision to purchase the product and the willingness-to-pay for the product. The presentation concluded with remarks about the limits of this phenomenon and its implications for purchasing behavior.

In the second paper ("Do Larger Credit Limits Result in Greater Credit Usage?: The Effects of Loan Format and Credibility"), Dilip Soman and Amar Cheema posed the more general question of identifying situations in which consumers seem to readily use debt to finance current consumption. Recent research predicts that consumers should be strongly debt aversive (e.g. Prelec and Loewenstein 1998) and that the marginal propensity to consume out of future income should be zero (Thaler 1999). However, a large fraction of consumers in the real world use debt, and their usage increases as the credit limit available to them increases. Soman and Cheema posed the question that if theory predicts that debt aversion, why do so many consumers borrow from their future income to finance current consumption?

In order to tackle this question, their presentation discussed findings from three laboratory experiments and one consumer survey in which they studied the psychological costs (e.g. guilt, signal of failure) that consumers need to expend in order to overcome willpower (which prevents them from borrowing in the first place). Their results show that certain loan formats (e.g. credit cards) facilitate borrowing by making it easier to overcome willpower. Further, they show that the propensity to use debt is also moderated by the inferred credibility that consumers assign to the credit limit setting process. Their results suggest that debt aversion will indeed hold if consumers are well calibrated about the credibility, and if the loan format requires the expenditure of a large psychological cost to overcome willpower.

While the first two presentations focussed on the effect of credit availability to deal closure, the third presentation by Sue O’Curry ("Moment by Moment Budgeting? Effects of Pay Frequency and Amount on Budgeting") examined mental accounting practices used by consumers to "finance" current purchases using current wealth. Using a number of surveys with "real" consumers, O’Curry finds that consumers tend to assign different components of their incomes to different types of potential expenses. For instance, she found that workers who received tip income or irregular commissions often set target amounts to meet their basic budgets, and treated amounts over the target as "fun" money. This accounting system, while not normative (where a consumer should budget on the basis of total income) allows consumers to allocate a source of funds for frivolous expenses from their present wealth. Another example of such mental accounting is the allocation of "gift money" to purchasing luxuries rather than necessities. O’Curry discussed the finding that budgets were often temporally based, so a waiter’s fun money would be based on how he or she did on a single night, while a salesperson’s fun money would be based on a two-week period. Workers who were paid consistent amounts on a regular basis tended to have fairly consistent budgeting habits; although they frequently reported that gift money would bespent for fun, rather than spent on necessities or saved.

In the fourth presentation by George Loewenstein ("Consequences of Naivety about the Endowment Effect for Market Transactions" co-authored with Leaf VanBoven and David Dunning), the focus shifted to the evaluation of a transaction and the role of "perspective taking" on the efficiency with which deals are closed. Loewenstein presented a series of experiments showing that while completing market transactions (1) people are unaware that others will be subject to the endowment effect; (2) they lose money as a result of that lack of understanding (potentially profitable transactions do not occur); (3) they misattribute the other party’s reluctance to trade to negative character traits, and (4) they learn to correct this mistake even with extensive experience in a repetitive buying/selling exercise with a single good, but (5) fail to generalize the insights gained from this experience to the same buying/selling task conducted with a different good. Loewenstein also discussed some ideas and findings on what it takes to understand the other side’s perspective, and consequently its implications for how efficiently deals are closed.

Collectively, the four papers in this special session studied a neglected aspect of purchasing behaviorBclosing the deal. Participants in a discussion following the paper presentations concurred that not much is known about the other resources that consumers need to bring to the table to complete a transaction and that this special session made a start at focussing research attention on, and at raising directions for future research in this area.


Feinberg, Richard A. (1986), "Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretations," Journal of Consumer Research, 13 (December), 348-356.

Gourville, John T. and Dilip Soman (1998), "Payment Depreciation: The Behavioral Effects of Temporally Separating Payments from Consumption," Journal of Consumer Research, 25 (September), 160-174.

Meyer, Robert (1998), "The Cognitive Calculus of Maintenance," paper presented at the Behavioral Decision Research in Management Conference, June 1998, Miami, FL.

Payne, John W., James Bettman and Eric Johnson (1993), The Adaptive Decision Maker, Cambridge University Press, NY: New York.

Prelec, Drazen and George Loewenstein (1998), "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, 17 (1), 4-28.

Soman, Dilip (1999), "Effects of Payment Mechanism on Spending Behavior: The Illusion of Liquidity," Working Paper, University of Colorado at Boulder.

Strahelivitz, Michal and George Loewenstein (1998), "Possessive Women and Detached Men: The Effects of Gender and Ownership Over Time on the Valuation of Objects," paper presented at the Behavioral Decision Research in Management Conference, June 1998, Miami, FL.

Thaler, Richard H. (1999), "Mental Accounting Matters," Journal of Behavioral Decision Making, 12(3), 183-206.

Wansink, Brian (1996), "Can Package Size Accelerate Usage Volume?," Journal of Marketing, 60 (3), 1-14.



Dilip Soman, Hong Kong University of Science and Technology


NA - Advances in Consumer Research Volume 27 | 2000

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