JOHN G. LYNCH JR.

Introduction to the Journal of Marketing Research Special Interdisciplinary Issue on Consumer Financial Decision Making
Consumer welfare is strongly affected by household nancial decisions, both large and small. Consumers choose houses and mortgages, save for college education or retirement, invest in their own human capital development to provide a stream of nancial benets over time, use credit cards to fund current consumption, decide which debts to pay rst and how much to pay on each, invest to achieve higher wealth at greater risk, pay for insurance to reduce risk, and pay for health care. In all these domains, consumers are often poorly informed and susceptible to making serious errors that have great personal and societal consequences. Basic research from many social science and business disciplines can enhance our understanding of how consumers actually make such decisions and how consumers can be helped to make better decisions through innovations in public policy, business, and consumer education. This special interdisciplinary issue of Journal of Marketing Research was funded by a grant from the Russell Sage Foundation and the Alfred P. Sloan Foundation under a program that supports behavioral research on consumer nance by economists and nance scholars (for a review of this stream of work, see Tufano 2009). Coeditors Shlomo Benartzi, Stefano DellaVigna, George Loewenstein, and I proposed this special issue to solicit work from a broader set of disciplines studying these topics and to get scholars with different skills but common substantive interests to join in conversation. We were pleased that the submitted papers and those ultimately accepted for publication came from such a rich mix of disciplines. We were equally pleased with the emerging interest in these topics by marketing scholars. Included in the special issue are articles from scholars in psychology, economics, behavioral science, communication, management, nance, and marketing. Of the 14 articles, 8 have one or more coauthors from outside marketing, often working in collaboration with marketing scholars. This pattern is quite different from a typical issue of Journal of Marketing Research. We hope this special issue leads to signicant cross-fertilization across elds and, therefore, to articles of particularly high impact. THE DOMAIN OF CONSUMER FINANCIAL DECISION-MAKING RESEARCH The emerging eld of consumer nancial decision making has fuzzy boundaries. Although it could be argued that any purchase is a nancial decision (e.g., when a consumer searches for a lower price), I do not share that expansive view. Decisions are nancial only insofar as they have dramatic effects on a consumers overall nancial picture due to the size of a single expenditure (Himmelstein et al. 2009) or the accumulated effects of repeating the same pattern due to personal traits, abilities, and habits (Lynch et al. 2010; Soll, Keeney, and Larrick 2011; Spiller 2011). Decisions are also nancial when consumers choose nancial products to enhance nancial well-being (Thaler and Benartzi 2004). Consumer nancial decision making is marked by a focus on a particular set of core decisions that readers will nd reected in the articles in the special issue:
Spending patterns and resource allocation for small items and big-ticket expenses, such as health care (Schwartz, Luce, and Ariely; Sussman and Olivola; Wilcox, Block, and Eisenstein); Borrowing and repaying (Amar, Ariely, Ayal, Cryder, and Rick; Bolton, Bloom, and Cohen; Navarro-Martinez, Salisbury, Lemon, Stewart, Matthews, and Harris); Saving (Hersheld, Goldstein, Sharpe, Fox, Yeykelis, Carstensen, and Bailenson; McKenzie and Liersch; Soman and Cheema) and investing (Galak, Small, and Stephen; Herzenstein, Sonenshein, and Dholakia; Lee and Andrade; Strahilevitz, Odean, and Barber); and Purchase of complex nancial products (Guarav, Cole, and Tobacman).

*John G. Lynch Jr. is Ted Anderson Professor and Director of the Center for Research on Consumer Financial Decision Making, University of ColoradoBoulder (e-mail: john.g.lynch@colorado.edu). Along with Guest Coeditors Shlomo Benartzi, George Loewenstein, and Stefano DellaVigna, he thanks the Alfred P. Sloan Foundation and Russell Sage Foundation for making the special issue possible. The guest editors thank the team of special issue associate editors and reviewers, Managing Editors Sam Battan, Marco Alvarado, and Chris Bartone, and JMR Editor Tulin Erdem for their support.

In addition, certain core concepts are particularly relevant in nancial decisions:

Journal of Marketing Research Vol. XLVIII (Special Issue 2011), SiSv

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Nonlinear reasoning due to compound interest (McKenzie and Liersch; see also Stango and Zinman 2009); The intertemporal trade-off in consumption between smaller, sooner and larger, later rewards (Hersheld et al.; Soman and Cheema; Wilcox, Block, and Eisenstein); The role of advisers and inuence agents who may be either self-interested or motivated to help the consumer (Bolton, Bloom, and Cohen; Gaurav, Cole, and Tobacman; Schwartz, Luce, and Ariely), and similar uncertainty by nancial service 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).

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saving less than 2% of their weekly earnings. A social worker provided nancial counseling to families of laborers on a government infrastructure project and encouraged them to set a savings goal of either 4% or 8%. The social worker gave laborers wages allocated for savings either in one sealed envelope or partitioned into two sealed envelopes; envelopes were either plain or adorned with pictures of the laborers children. As the authors predict, the laborers saved more when given their earmarked savings in two envelopes rather than one, presumably because partitioning stops a what-the-hell run on spending when dipping into the rst sealed envelope. This effect was more dramatic in cases in which guilt over dipping into the savings was magnied by putting pictures of the laborers children on the savings envelopes. Hersheld et al. test the conjecture that people fail to save for retirement because they lack a connection with their future selves (Bartels and Rips 2010; ErsnerHersheld et al. 2009). The authors present respondents with a hypothetical resource allocation tasks in which they could allocate a windfall to buy something nice for someone special, invest in a retirement fund, plan a fun extravagant occasion, or put it into a checking account after exposure to a virtual reality avatar of their current selves or an age-progressed avatar of themselves. The authors nd that respondents allocated more to retirement after exposure to their age-progressed avatar. In subsequent studies, this effect extended to behavior in incentive-compatible and hypothetical tasks, and similar effects were obtained using technologically inexpensive websites that age-progressed peoples uploaded pictures. DEBT REPAYMENT AND USE OF CREDIT When spending exceeds income, consumers incur debt. Several articles in the special issue pertain to mistakes consumers are prone to make in managing debt and credit. Amar et al. show that people have debt account aversion; that is, when people have debt in multiple accounts, they tend to pay off the smallest debt rst because doing so feels like they are making progress in settling debts. However, the normatively optimal behavior is to pay off debts carrying the highest interest rates rst. The authors show that real consumers carrying debt on multiple credit cards allocate a higher proportion of their monthly payments to the account with the smallest balance. In experiments with an incentive-compatible debt management game, people pay off smaller debts earlier even when they carry lower interest rates. However, if cash available to pay off debts is insufcient to pay off the small but low-interest debt, people behave more optimally. The authors show that people are more successful at reducing their debts over time if those debts are rolled into one debt consolidation account, even though in this condition the interest rate charged was slightly higher than the weighted average of the 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 single secured loan, perhaps with a slightly lower interest rate but with a much longer repayment period. Critics charge that the result is much larger total interest payments over the life of the loan and no less debt after several years than before the remedy was sought.

Research on consumer nancial decision making often has a more substantive focus than behavioral work that typically appears in journals, such as JMR, Journal of Consumer Research, and Journal of Consumer Psychology. Research often focuses on particular classes of remedies intended to help consumers make better decisions, such as the following:
Education (Bolton, Bloom, and Cohen; Gaurav, Cole, and Tobacman; McKenzie and Liersch), Information disclosures (Navarro-Martinez et al.), and Defaults and other forms of choice architecture (Amar et al.; Hersheld 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 the special issue. The articles are organized around the substantive topics of saving, debt repayment and credit (mis)use, spending patterns, emotional inuences on investing, and the role of advisers in nancial decisions. SAVING Nonlinear reasoning is critical to both borrowing and saving decisions because of the effect of compound interest. In their study, McKenzie and Liersch ask respondents to imagine two people of the same age beginning their careers with a plan to retire in 40 years. Alan deposits $100 every month into his retirement account, and Bill waits 20 years to start but then deposits $300 every month. If the annual return is 10% for both, which one will have more money saved in 40 years at the time of retirement? Most people think that Bill will have more money, but in actuality Alan will have more than twice as much. McKenzie and Liersch show that people make this mistake because they expect cumulative savings to grow linearly (with contributions) rather than exponentially, ignoring the effects of interest on interest. This is an important nding because mistaken extrapolation leads people to underestimate the cost of waiting to save. Importantly, this bias is independent of the ability to explain the concept of compound interest. Although people drastically underestimate how much wealth they will amass if they save at a certain rate, showing them the (higher) projected exponential growth makes them 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. In a 14-week eld experiment, workers received a portion of their weekly wages in sealed envelopes earmarked for savings (Zelizer 1994). Before the intervention, 90% had been

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what-the-hell effect of goal violation. Reducing the psychological impact of the balance by increasing available credit mitigates these effects. People high in self-control may have trouble avoiding unwanted behaviors in spending, and ironically, these are the people most likely to perceive failure from carrying a balance that compels them to spend more. Sussman and Olivola continue the theme of psychological inuences on spending behavior. They focus on how differences in the taxes paid when choosing particular alternatives inuence choices. They nd that people give greater weight to a tax of a certain amount than a nontax cost of equal monetary value. That is, people are more willing to travel to a store to avoid taxes than for a sale with greater nontax savings, and they are more willing to stand in line longer to save on taxes than to save an equivalent nontax amount. These preferences also affected investment behaviors, perhaps explaining the paradox of why people in low tax brackets exhibit such interest in tax-free municipal bonds. People differ in how painful they nd paying taxes, and those with political afliations to antitax parties are the ones most repelled by taxes. EMOTIONAL AND IRRATIONAL INFLUENCES ON INVESTING Strahilevitz, Odean, and Barber show another way that emotional reactions affect investing behavior. Normatively, the past performance of a stock does not predict its future performance, but the authors show with real brokerage data that investors are unwilling to repurchase stocks they previously sold at a loss or stocks they sold that subsequently appreciated in value. In addition, they are willing to repurchase stocks that previously led to positive emotions but not those that led to regret and disappointment. Lee and Andrade investigate the effects of incidental fear on the trading behavior of online investors. They nd that in experiments with multiple decision rounds, fearful participants sell their assets earlier than the controls. They demonstrate that fearful people project that others are fearful as well; thus, expecting these other people to sell, fearful people also sell. An emerging area for investment is micronance, in which people lend small sums of money to others. Such investing likely reects a mix of motivations, including prosocial motivations similar to those inspiring charitable giving and motivations to gain by making protable investments. Two articles in the special issue investigate micronance decision making. Galak, Small, and Stephen examine transactions on Kivaon which people make small loans to small businesses and entrepreneurs in developing countries. Prior work on charitable giving supports the notion of an identiable victim effectthat is, more giving to individuals than to small or large groups with a similar need because more emotional reaction is sparked by empathy for the individual. The authors code characteristics of Kiva loans and borrowers and nd preferential lending to smaller rather than larger groups of borrowers. They also show that investors prefer to lend to borrowers who are similar to themselves. Herzenstein, Sonenshein, and Dholakia analyze the narratives that Prosper.com borrowers create to explain why lenders should lend their money. Borrowers tend to

Bolton, Bloom, and Cohen note that for-prot rms aggressively market debt relief, which encourages the negative nancial behaviors that got consumers into trouble in the rst place. They investigate the forms of nancial literacy education that can protect consumers. Prior research has considered relatively mathematical aspects of nancial literacy (Lusardi and Mitchell 2007). Bolton, Bloom, and Cohen show the benets of a combination of two kinds of interventions: Loan-focused literacy helps debtors understand how loans work, and lender-focused literacy helps them understand lender self-interest and imparts a form of persuasion knowledge (Campbell and Kirmani 2000). The authors expose consumers to debt consolidation loan ad messages, followed by loan-focused explanations of how loans work, lender-focused education about the motives of lenders, both, or neither. They nd across a set of measures that only the combination promotes healthy behaviors and appropriate coping. That is, it is not enough to be skeptical of lender motives without understanding how loans work, nor is it enough to understand how loans work without understanding the marketplace motives of sellers. A second study exposes consumers to one-sided debt consolidation loan advertisements. Subsequent education about basic nancial numeracy had perverse effects, but when combined with loan and lender literacy education, that same nancial numeracy education reduced the appeal of the advertised loans by those initially most attracted. This nding lls an important gap in the literature on why nancial education efforts often show weak effects. Navarro-Martinez et al. study the effects of minimum required payment information on consumer debt repayment decisions. Stewart (2009) reports research with U.K. consumers showing that people repay less when a minimum payment is specied than without any specied minimum, because of anchoring on the low number listed on the bill. Navarro-Martinez et al. replicate this nding with U.S. consumers. They note that lenders would not agree to a statement with no minimum, so they investigate the effects of varying the level of the minimum. They nd that the effects of doing so depend on individual differences in whether people tend to pay the minimum. Increasing minimum repayments may cause those who tend to pay the minimum to pay more but those who do not have this tendency to be unaffected or pay less. The authors then test for similar effects with real repayment behavior by customers of U.K. credit card companies. They nd a mostly positive association between minimum payment levels and actual repayment, modeling how the minimum level affects the mixture of consumers repaying in full, making partial repayment greater than the minimum, and repaying the minimum or less. They tentatively conclude that increasing the required minimum payment would have positive effects on the repayment behavior of most consumers. SPENDING PATTERNS Wilcox, Block, and Eisenstein investigate the effects of credit card debt and available credit on spending, rather than on repayment behavior as in the two prior articles. They nd that when consumers are carrying a balance on their credit cards, the higher their level of self-control, the more they spend when given an opportunity in a real auction. The authors attribute this surprising nding to the

Introduction to the Special Issue

make claims that are unveriable cheap talkrationally, investors should ignore this information because borrowers incur no costs for making false claims. The authors nd however that certain classes of narrative claims are associated with a higher likelihood of funding. With data on loan repayment behavior, the authors nd that use of more categories of claims increases the chances that a loan will be funded but decreases the chances that it will be repaid. They show that it is not just the number of claims but also their content that matter. Claims to be trustworthy or successful predict higher rates of funding but do not predict loan performance, whereas claims to be moral predict repayment and economic hardship claims predict failure to repay. THE ROLE OF FINANCIAL ADVISERS Gaurav, Cole, and Tobacman report large-scale randomized eld experiments on the uptake of an innovative nancial product: rainfall insurance for poor farmers in India. The complexity of the product and its credence nature had contributed to low uptake. The authors invited half the farmers in the sample to a nancial education session by a nongovernmental organization, in which various nancial concepts, including insurance, were explained in an interactive way; the other half did not receive this invitation. The authors cross this manipulation of nancial education with the presence or absence of several other marketing interventions offered in the context of a marketing visit after a weeks delay. They nd that attending the nancial education session doubled uptake from 8% to 16%. Of the other marketing interventions, a money-back guarantee was the only successful one. Although the authors nd a benecial effect of advice by a source that did not stand to benet from a sale, the cost of the nancial education exceeded the premiums paid, highlighting the challenges of creating a 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 trust for expert advisers in the context of the critical nancial decision of paying for health care. Health care providers are often paid per procedure, creating an inherent conict of interest. They may prot from patients who follow their advice to choose a costly treatment option over another cheaper option that may be just as effective. The authors show that patients who trust their health care provider are more reluctant to solicit second opinions. This reluctance increases the cost of health care without improving quality by making consumers more likely to accept the experts advice to use a more costly procedure. The authors investigate the case of dental work for crowns and llings. Here, cosmetically more attractive porcelain and resin materials are less durable and more prone to failure than silver or gold in back teeth that are not visible to others. The authors nd that when controlling for dentists base rates of using the different materials, patients with longer relationship tenure receive the more costly material more often and then incur higher expenses for repairs later. The authors also report lab experiments that show that people would not seek a second opinion in circumstances in which they would advise a coworker to seek one and that unwillingness to seek a second opinion is inuenced by the dentists granting of personal favors.

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CONCLUSION Consumers basic nancial equation involves generating nancial resources and spending them wisely by allocating them in accordance with long-term priorities and opportunity costs (Katona 1974; Spiller 2011). Any imbalance of the rate of generating income and spending it in a particular period produces savings or debt. Financial instruments enable people to spend beyond their means in the present or live beneath their means by saving and investing so that more resources are available to fund future consumption. Financial products can also reduce risk in terms of the resources people will have available for future consumption. These instruments can enhance consumer welfare, but few people are sufciently sophisticated to avoid consequential mistakes. At any given time, consumers are focused on some small part of the overall nancial picture but do not appreciate all the interdependencies. Their decisions are inuenced by a fascinating set of individual traits and skills, situational factors, and social motives. Public policy makers, employers, and self-interested sellers are all in the mix nudging, informing, and persuading. Researchers who undertake the task of unpacking and explaining these consumer nancial decisions will be rewarded with unusual intellectual stimulation of learning from colleagues in adjacent disciplines. They will discover that their substantively oriented work truly matters to many audiences in academia, business, and society. John G. Lynch Jr. University of ColoradoBoulder Guest Editor in Chief REFERENCES
Bartels, Daniel M. and Lance J. Rips (2010), Psychological Connectedness and Intertemporal Choice, Journal of Experimental Psychology-General, 139 (1), 4969. Campbell, Margaret C. and Amna Kirmani (2000), Consumers Use of Persuasion Knowledge: The Effects of Accessibility and Cognitive Capacity on Perceptions of an Inuence Agent, Journal of Consumer Research, 27 (June), 6983. Ersner-Hersheld, Hal, M. Tess Garton, Kacey Ballard, Gregory R. Samanez-Larkin, and Brian Knutson (2009), Dont Stop Thinking About Tomorrow: Individual Differences in Future Self-Continuity Account for Saving, Judgment and Decision Making, 4 (4), 28086. Himmelstein, David U., Deborah Thorne, Elizabeth Warren, and Stefe Woolhandler (2009), Medical Bankruptcy in the United States, 2007: Results of a National Study, American Journal of Medicine, 122 (8), 74146. Katona, George (1974), Psychology and Consumer Economics, Journal of Consumer Research, 1 (1), 18. Lusardi, Annamaria and Olivia Mitchell (2007), Financial Literacy and Retirement Preparedness, Business Economics, 42 (1), 3544. Lynch, John G., Jr., Richard Netemeyer, Stephen A. Spiller, and Alessandra Zammit (2010), A Generalizable Scale of Propensity to Plan: The Long and the Short of Planning for Time and Money, Journal of Consumer Research, 37 (June), 108128. Madrian, Brigitte C. and Dennis F. Shea (2001), The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior, Quarterly Journal of Economics, 116 (4), 114987.

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Thaler, Richard H. and Shlomo Benartzi (2004), Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving, Journal of Political Economy, 112 (1), 16488. and Cass R. Sunstein (2008), Nudge: Improving Decisions About Health, Wealth, and Happiness. New Haven, CT: Yale University Press. Tufano, Peter (2009), Consumer Finance, Annual Review of Financial Economics, 1, 22747. Zelizer, Viviana A. (1994), The Social Meaning of Money: Pin Money, Paychecks, Poor Relief, and Other Currencies. Princeton, NJ: Princeton University Press.

Soll, Jack, Ralph Keeney, and Richard Larrick (2011), Consumer Misunderstanding of Credit Card Use, Payments, and Debt: Causes and Solutions, paper presented at the 2011 Boulder Summer Conference on Consumer Financial Decision Making, Boulder (June 2628). Spiller, Stephen A. (2011), Opportunity Cost Consideration, Journal of Consumer Research, 38 (December), forthcoming. Stango, Victor and Jonathan Zinman (2009), Exponential Growth Bias and Household Finance, Journal of Finance, 64 (6), 280749. Stewart, Neil (2009), The Cost of Anchoring on Credit-Card Minimum Repayments, Psychological Science, 20 (1), 3941.