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Payment Depreciation: The Behavioral Effects of Temporally Separating Payments from Consumption

John T Gourville and Dilip Soman

Journal of Consumer Research, 1998, vol. 25, issue 2, 160-74

Abstract: Research suggests that individuals mentally track the costs and benefits of a consumer transaction for the purpose of reconciling those costs and benefits on completion of the transaction (Prelec and Loewenstein 1998; Thaler 1980,1985). In transactions where costs precede benefits, this can lead to a systematic and economically irrational attention to sunk costs (Arkes and Blumer 1985; Thaler 1980). In this article, we consider economic exchanges in which costs significantly precede benefits, as with many prepayment types of consumer transactions. We predict a consumer will gradually adapt to a historic cost with the passage of time, thereby decreasing its sunk-cost impact on the consumption of a pending benefit. We label this process of gradual adaptation to costs 'payment depreciation." In a series of experiments, we find evidence of payment depreciation across a range of consumer transactions and offer insight into the behavioral implications of temporally separating costs from benefits. Copyright 1998 by the University of Chicago.

Date: 1998
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Handle: RePEc:oup:jconrs:v:25:y:1998:i:2:p:160-74