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The Budget Contraction Effect: How Choice: Contracting Budgets Lead To Less Varied
The Budget Contraction Effect: How Choice: Contracting Budgets Lead To Less Varied
HUBER,
In stable economic times, approximately 300,000 new pay cut, a reduction in hours, or an involuntary transition to
unemployment claims are filed in the United States each part -time work (Taylor et al. 2010). More than half those
month. People who have lost their jobs typically experience an surveyed (62%) also reported reducing their household
spending in response to the economic contraction.
income loss of 25%–40% in the 12 months following the loss In addition to income contractions from economic hard-
(Ruhm 1991; Stephens 2001), either because they fail to find a ship, many other life events can cause consumers to reduce
new job or because the new job pays less than the lost job their disposable budgets. Two of the most significant and
(Stephens 1997) . Matters are even worse when the economy common events are paying for college (Souleles 2000) and
retirement (Banks, Blundell, and Tanner 1998; Bernheim,
experiences a significant contraction. For exam-ple, a recent
Skinner, and Weinberg 2001). For example, Bernheim,
Pew survey found that during a recession (e.g., the one that Skinner, and Weinberg (2001) find that retirement
began in 2007), 55% of adult U.S. workers experienced a coincided with a drop in U.S. food budgets of 24% for
work-related financial contraction due to a households in the first income quartile, 15% for those in the
*Kurt A. Carlson is Associate Professor of Marketing, McDonough School
second, and 9% for those in the third and fourth quartiles.
of Business, Georgetown University (e - mail: kurt.carlson@georgetown. edu).
The prevalence of budget contractions in everyday con-
Jared Wolfe is Assistant Professor of Marketing, LIU Post (e-mail: jared. sumer life raises the important question of how consumers
wolfe@liu.edu). Simon J. Blanchard is Assistant Professor of Marke-ting, adjust their spending under a budget contraction compared
McDonough School of Business, Georgetown University (e-mail: simon. with a budget expansion. The standard economic view is that
blanchard@georgetown.edu). Joel C. Huber is Schwartz Professor of
consumers move up and down their utility surface to whatever
Marketing, Fuqua School of Business, Duke University (e-mail: joel.
huber@duke.edu). Dan Ariely is Duke Professor of Marketing, Fuqua School allocation provides the highest utility for the cur-rent budget.
of Business, Duke University (e-mail: dandan@duke.edu). Stephen Nowlis A basic assumption is that the trajectory of a person’s budget
served as associate editor for this article. does not change the shape of his or her util-
ISSN: 0022-2437 (print), 1547-7193 (electronic) 337 Vol. LII (June 2015), 337–348
338 JOURNAL OF MARKETING RESEARCH, JUNE
ity surface. This means that if all other factors are held con- 2015 increase (decrease) spending on essential goods that
stant (e.g., tastes, prices, liquidity), the path down the are consumed in less (more) visible circumstances,
utility surface will be the same as the path up the surface.
For bud-get allocations, this means that consumers will compared with when the economy is expanding.
allocate their budget to the same set of goods in the same In contrast with prior research, which has focused mainly
a on
proportions for budget of $ X, regardless of whether their aggregate income changes and their effects on aggregate
was
previous budget greater than or less than $X. spending, we examine the effects of budget changes on allo-
In this research, we contend that this single path assump- cations for individual consumers. We do so for three main
tion and the implications derived from it are not warranted reasons. First, it is difficult to analyze income effects with-out
when consumers allocate a sequence of budgets. We pro- first specifying consumer expectations. Specifically, the study
pose that when a consumer allocates an initial budget of income effects requires specification of whether an income
across an assortment of items, the amount allocated to each shock was anticipated or unanticipated and whether it was
item serves as a reference point for subsequent allocations. expected to be permanent or transitory (Jappelli and Pistaferri
2010) . Second, by focusing on budgets instead of income, we
If a new budget is lower than the prior budget, the
can avoid the complex issue of expenditure smoothing through
consumer must allocate less to some items than the saving or borrowing against future income. Third, examining
reference level established under the previous allocation. In the effect of budget changes on allocations enables us to
accordance with loss aversion, we predict that consumers control for consumer myopia and liquidity constraints, the two
will anticipate psychological loss for every item for which hypotheses most typically advanced for asymmetric income
their new allo-cation is less than its reference allocation. To effects (Shea 1995a).
minimize the sum of these anticipated psychological losses, In addition to the focus on discretionary budgets, the cur-
consumers will allocate cuts to a relatively small subset of rent work departs from prior work in two other important
items. As a consequence, the number of different items to ways. First, in general prior research has used either panel
which a given budget (e.g., $100) is allocated (which we
data or aggregate -level consumption data to explore the
refer to as “allo-cation variety”) will be fewer when the
budget sequence is contracting (i.e., if the previous budget effect of income changes on expenditures as a whole. Such
was higher at, for example, $ 150) than when it is settings are quite different from individual- level experi-
expanding (i.e., if the previ-ous budget was lower at, for ments that examine how a specific consumer reacts to a
example, $50). We refer to this effect of budget trajectory budget change. Consequently, prior research lacks the
on allocation variety as the “bud-get contraction effect.” strong internal validity and the concomitant causal infer-
In the remainder of this article, we review the relevant lit- ence that experimental designs provide. Second, whereas
erature and develop our research hypothesis that allocations of prior research has examined aggregate expenditures or how
a given budget will be less varied when that budget was part of spending shifts from certain types of items to other types of
a contracting sequence than when the same budget was part of items, we examine how the variety in the allocation basket
an expanding sequence. We then present five choice fluctuates in response to budget changes. This enables us to
experiments that show choice patterns consistent with the make direct statements not about substitution effects across
budget contraction effect; with these experiments, we trace the products but about the shape of the income expansion path.
budget contraction effect’s origins to loss aver-sion, in which The Consumer’s Budget Allocation Problem
consumers use previous budget allocations as a reference point When allocating a budget across a set of items, the con-
when contemplating future allocations. sumer’s budget allocation problem can be stated as follows:
THEORETICAL DEVELOPMENT “to identify and commit to the affordable assortment of items
that is expected to provide the greatest utility.” In this
Consumption in the Face of Changing Budgets
statement, the identification with and commitment to an
It is well established that changes in income have a sig-
assortment define a choice (Russo and Carlson 2002).
nificant influence on aggregate consumption patterns (e.g., Assortment refers to the set of items to which a nonzero
Hall 1979; Hall and Mishkin 1982). It is also known that amount of the budget is allocated. The term “affordable”
consumers do not always react symmetrically to increasing simply means that the consumer has sufficient resources to
and decreasing income. For example, Shea (1995a, b) ana- cover the total cost of the assortment. The phrase “expected to
lyzes quarterly U.S. consumption data and finds that drops in provide the greatest utility” means that the consumer’s
consumer income lead to more changes in consumption than objective is to maximize expected utility, given an evalua-tion
equal income increases. Likewise, Bowman, Minehart, and of the alternatives. Importantly, when making such choices,
Rabin (1993) find asymmetry in how total consumption consumers do not necessarily maximize actual util-ity but
changes in the face of news regarding future income (expected instead maximize expected utility (Coombs, Dawes, and
to decrease or expected to increase). They find that when Tversky 1970) . This means that consumers can make choices
consumers expect income to increase, they are more likely to that turn out to be suboptimal if their expectations are wrong,
immediately alter their total consumption than when they as has been well documented in literature on affective
expect their income to decrease. Dargay (2001) finds that forecasting (e.g., Kahneman and Thaler 2006; Loewenstein,
income effects on car ownership are not symmetric, with O’Donoghue, and Rabin 2003) . The discon-nect between
consumers being less likely to cut car spending when income expected and actual utility often occurs because expected
declines than to expand car spend-ing when income expands. utility depends on how consumers evalu-ate alternatives, and
More recently, Kamakura and Du (2012) observe that during a evaluations often depend on the context in which the
recession, consumers alternatives are considered (e.g., Johnson and
The Budget Contraction Effect 339
When
it comes to allocating different budgets over time, optimalDorosfindwhateverthatconsumersreasonabletendquantitytoacceptofanasitemnormalthey andare
scenario, but this time with a budget of $ 120. The stimuli Figure 1
for participants in the contracting budget were the same as EXPERIMENT 1: BETWEEN-SUBJECT NUMBER OF GROCERY
in the expansion budget, except that the first budget was
$120, the second budget was $80, and the third budget was ITEMS PURCHASED BY CONDITION
$40. (The experimental stimuli for this and subsequent
experiments can be found in the Web Appendix.) 5.50
Because real prices and products were used in this experi- 5.12
ment, it was not possible to restrict participants to spending
the exact dollar amount of each shopping spree (e.g., 5.00 4.82
exactly $40). Therefore, participants in this experiment 4.62
were not required to spend the exact amount of their shop- 4.50
ping spree budget. Rather, those who overspent their budget 4.17
did so expecting to cover the difference from their own 4.00
pockets, and those who underspent their budget did so 3.57
expecting to forfeit the remainder of the shopping spree 3.50
budget.1
Results 3.00 2.99
After eliminating nine participants with missing values,
we were left with 442 observations (for three budget levels) 2.50 $40 $80 $120
for our analyses. The experimental design included two Budget
budget trajectories (expanding and contracting) across sub-
jects and three budget levels ($ 40, $80, and $120) within Expanding Contracting
subject. We analyzed allocation variety as a function of (1) Linear (expanding)
three budget levels ($40, $80, and $120; within-subject) and Linear (contracting)
(2) two budget trajectories (expanding and contracting;
between-subjects) with a within-subject analysis of variance
(ANOVA). In addition to including individual random contracting than the expanding budget condition (M = .36;
effects, we included the total number of items purchased as F(1, 879) = 6.86, p = .01). This difference in slopes provides
a covariate. We then used planned contrasts to investigate initial support for the budget contraction effect.
our hypotheses. Another approach to test for the budget contraction effect
As Figure 1 shows, higher budgets lead to a greater mean is to examine allocation variety, measured as the number of
number of grocery items chosen. (For reference, Table 1 different products chosen with the middle budget across
reports the sample mean quantities purchased of each item budget trajectories. This approach involves a comparison in
at each budget level.) We found a significant interaction which participants in both conditions have made one prior
between budget levels and the budget trajectory (F(2, 879) = allocation and are facing the same current budget. Contrasts
3.46, p = .03), which is best explained by contrasting the revealed lesser allocation variety for the $80 budget in the
slopes of the budget trajectory. The within-subject differ- contracting condition (M = 4.17) than in the expanding bud-
ence in allocation variety between the lowest budget level get condition (M = 4.62; F(1, 879) = 20.41, p < .01) . At all
and the highest budget level was significantly greater for the budget levels, participants in the contracting condition had
lesser allocation variety than those in the expanding condi-
1 The average total spending at the $40, $80, and $ 120 budget levels did
not significantly differ between the expanding and contracting conditions tion. Specifically, planned contrasts revealed that when the
($40 budget: M exp = 58.96, M con = 58.57; F(1, 450) = .00, p > .90; $80 bud- budget was $40, participants in the contracting condition
get: Mexp = 103.60, M con = 106.70; F(1, 450) = .03, p > .80; $120 budget: had lesser allocation variety in their choice sets (M = 2.99)
Mexp = 149.28, Mcon = 129.06; F(1, 450) = .95, p > .30). than those in the expanding condition (M = 3.57; F(1, 879) =
Table 1
EXPERIMENT 1: MEAN QUANTITY OF GROCERY ITEMS BY BUDGET LEVEL AND TRAJECTORY
Cheesecake Factory Cheesecake .32 .14 .49 .39 .63 .71 .31 .58
342 JOURNAL OF MARKETING RESEARCH, JUNE
2015 as they wished. Each participant received and
36.78, p < .001). Finally, at the highest budget level ($120),
allocation variety also significantly differed between par- allocated three retirement budgets in either an expanding
in sequence ($500, $1,000, $ 1,500) or a contracting sequence
ticipants in the contracting condition (M = 4.82) and those
the expanding condition (M = 5.12; F(1, 879) = 5.46, p = ($1,500, $1,000, $500).
.02). These effects hold when we control for the number of For
each of the three sequential budget allocation deci-
items purchased, in line with allocation variety (F(1, 879) =
sions, participants reported how much of the current budget
50.34, p < .01). (in dollars) they wished to allocate to each of the four
Discussion investment vehicles. We deemed vehicles that received a
The budget contraction effect we found is consistent with nonzero investment amount as having been invested in for
the notion that consumers try to avoid spreading losses shal-
that budget. Thus, a participant’s allocation variety for a
given budget could range from a low of one (i.e., the entire
lowly across many items and instead constrict them to a nar- budget allocated to one vehicle) to a high of four (i.e., some
rower set of items. Our explanation for the budget contrac-tion portion of the budget allocated to each of the four vehicles).
effect stems from the idea that the allocation of the initial As in Experiment 1, the key test was whether the mean and
budget provides a reference quantity for each item in the slopes for the allocations of a given budget were less varied
allocation set. Experiment 2 explores the generalizabil-ity of (i.e., applied to fewer vehicles) in the contracting sequence
the budget contraction effect by examining a setting in which than in the expanding sequence.
money is allocated to investments. In this case, the budget is Unlike in the grocery purchases, participants in this
not allocated to different products, but to an assortment of experiment were not led to believe that the previous alloca-
financial investment vehicles. Furthermore, the use of tion had been consumed, but rather that each new allocation
investments instead of groceries helps eliminate potential would be added to the previous month’s (e.g., “The govern-
variation due to any possibility of dependence among the ment has decided to up the allocation amount for this
available items; participants do not have any information to month. This month they are giving people $1,000 to
potentially attempt to make inferences about complementarity invest”). Thus, if the budget contraction effect only occurs
of the available alternatives. when people cannot pursue interperiod allocation
EXPERIMENT 2: ALLOCATION VARIETY IN strategies, it should not occur in this experiment.
FINANCIAL DIVERSIFICATION Results
It is common for people to have retirement accounts to As in Experiment 1, the experimental design had two
which they contribute each month. Such accounts generally budget trajectories (expanding and contracting; between-
allow investors to adjust how their balance is allocated subjects) and three budget levels ($500, $1,000, and
across various investments. In this experiment, we explore $1,500; within - subject), and we analyzed allocation
how people allocate investment contributions to various variety as a function of budget trajectories, budget level,
investment vehicles under either increasing or decreasing and their inter-action with a within-subject ANOVA. Three
investment allocation budgets. This experiment enables us measures of allocation variety were thus obtained for each
to examine whether the budget contraction effect general- of the 588 participants.
izes to a setting in which the budget and the items to which First, we found a significant interaction between budget
the allocations are made are both monetary. By limiting the allocation and budget trajectory (F(2, 1772) = 28.53, p <
number of investment vehicles to four and by sizing the .01). Figure 2 displays the (between- subject) number of
budgets so that there is sufficient money to allocate to all investments to which participants in the expanding and con-
four vehicles, we can mute any possible effects of differen- tracting conditions allocated each of the three budgets
tial consideration of costly alternatives in the initial alloca- (between-subject means). As in Experiment 1, planned bud-get
level budget trajectory within-subject planned contrast
tions of the declining and expanding budget conditions
revealed that the slope (difference in allocation variety)
(i.e., participants first faced with the largest budget and
between the largest and smallest budgets (within - subject) was
those first faced with the smallest budget) that could have
significantly greater in the expanding than the contract-ing
poten-tially existed in Experiment 1. In addition, because
condition (M = .44, F(1, 1772) = 54.78, p < .001). This again
there are no prices for the items in this setting and all items provides support for the budget contraction effect.
had posi-tive expected value, we could require participants
Second, we found, as expected, that allocation variety
to allo-cate the exact amount of each budget.
was lesser for the $1,000 budget under the contracting tra-
Method
jectory (M = 2.95) than for that under the expanding trajec-
Participants were 588 adults from a national online panel.
tory (M = 3.26; F(1, 1172) = 52.17, p < .001). Comparison
Each participant was asked to imagine that the U.S. govern-
of the allocation variety for the other budget levels revealed
ment was implementing a new retirement plan that gave
a pattern similar to that in Experiment 1. Specifically, at the
people money each month to allocate to four investment
lowest budget level ( $500), participants in the contracting
vehicles that differed in their risk and likely return: “very safe, condition had less allocation variety in their choice sets (M
guaranteed low returns”; “safe, almost always with modest = 2.57) than those in the expanding condition (M = 3.17;
returns”; “somewhat risky, normally with above average F(1, 1172) = 204.66, p < .001). In addition, at the highest
returns”; and “very risky, with the possibility for high returns.” budget level ($ 1,500), the difference was smaller but sig-
The plan allowed people to spread their monthly investment nificant (Mcontracting = 3.14, Mexpanding = 3.30; F(1, 1172) =
stipend/budget across the four vehicles 14.73, p = .01).
The Budget Contraction Effect 343
Figure 2 thanthatdecliningexpandingbudgetsbudgetsgenerateand,throughlessmeanslopeallocationtests,thatvarietythe
EXPERIMENT 2: BETWEEN-SUBJECT NUMBER OF
INVESTMENTS SELECTED BY CONDITION controlsuccessivechoicesdeclinesthan successivehaveamuchbudgetlargerexpansions.impacton initial
to reduce the number of days you spend traveling in at least ception of losses in budget contraction by showing a mod-
some of your chosen cities.”
All participants then reported the expected psychological anyerationpreviousofthe budget.effectwhen specific items are not allocated in
experience of making these cuts on nine-point scales (“How
much loss do you expect to feel as a result of adjusting your EXPERIMENT 4: ALLOCATION VARIETY WITHOUT
travel schedule by cutting out some of your chosen cities PRIOR ALLOCATIONS
altogether?” and “How psychologically painful do you expect The results of Experiment 3b show that consumers faced
your decision to cut out some of your chosen cities altogether with allocating a reduced budget anticipate that making broad,
will be?”) . On the same scale, participants assessed the shallow cuts to many alternatives will involve greater feelings
expected general difficulty of making the cuts (“How difficult of loss than making focused, deep cuts to a few alternatives.
do you expect your decision of which of your chosen cities to We claim that the basis of these concerns about loss is the
cut out altogether will be?”). We explore expectations of reference quantities established by the previous budget
difficulty and psychological experi-ence because, according to allocation. If so, the budget contraction effect should not occur
loss aversion, expectations of the psychological experience if participants do not allocate their initial budget because,
drive allocation decisions (e.g., the strategies taken by without an allocation of the budget, reference quantities will
participants in Experiments 1– 3a) , not the expected not emerge. To test this, we ask some partici-pants to examine
difficulty, actual difficulty, or actual psychological experience an initial set of alternatives with a budget in mind but not to
that results from the use of a par-ticular allocation strategy. actually allocate their initial budget.
Method. Participants were 416 adults from a national online
The first two questions enable us to assess whether expected panel. The experimental design was similar to that in
psychological experiences differ for the two strate-gies. The Experiment 1 involving grocery orders. However, this
general difficulty question enables us to determine whether experiment employed a 2 (budget trajectory: expanding or
participants perceive the two strategies as differen-tially contracting; between- subjects) 2 (prior allocation: yes or no;
effortful to apply, a potential alternative explanation for the between - subjects) design. All participants allocated an $80
budget contraction effect. We asked this question because if
grocery budget after facing either a $40 budget (expanding
participants expect the focused -cut strategy to be easier to
execute, the budget contraction effect might stem from a condition) or a $120 (contracting condition) and after either
perceived difference in effort needed to execute spe-cific allocating the initial budget (prior allocation) or not allocating
reduction strategies, rather than the difference in expected the initial budget (no prior allocation).
strategies. Results. Because the only budget allocated by all partici-
psychological experiences of executing different . pants was the $80 budget, the analysis in this experiment
The results reveal that participants in the broad- centers on the allocation variety of the $80 budgets. The
Results focus was on exploring whether the budget trajectory’s
cut condition expected to experience greater feelings of loss influence on allocation variety is moderated by whether
(M = 5.26) than those in the focused -cut strategy condition par-ticipants’ previous budget was allocated to items in
(M = 4.47; F(1, 122) = 4.79, p < .05). This same pattern their consideration set. If so, allocation variety for the $80
occurred for the psychological pain question, with partici- budget should be lesser in the prior allocation contracting
pants using the broad - cut strategy anticipating condition than in the other three conditions. We analyzed
directionally greater psychological pain (M = 3.66) than the alloca-tion variety with linear regression, with budget
those using the focused-cut strategy (M = 3.08; F(1, 122) = trajectory (1: contracting; 0: expanding), prior allocation (1:
2.28, p = .13). An equally weighted linear combination of yes; 0: no), and their interaction as predictors.
these two mea-sures produced the same result; those in the We found a marginally significant interaction between
broad -cut con-dition anticipated greater feelings of loss (M budget trajectory and prior allocation ( = –.7220, t(412) = –
= 4.46) than those in the focused -cut strategy (M = 3.77; 1.68, p < .10) . This interaction (depicted in Figure 4) can be
F(1, 122) = 4.50, p < .05). Finally, the anticipated difficulty decomposed by contrasting the simple effect of the bud-get
of imple-menting the two strategies did not differ (for both trajectory between prior allocation conditions. We found a
condi-tions, M = 4.29; F(1, 122) = .00, p > .50). significant effect of budget trajectory on allocation variety
Discussion. These data provide process evidence for the when the initial budget had been allocated, but no such effect
budget contraction effect, showing that consumers faced when it had not been allocated. Specifically, when the initial
with allocating a reduced budget anticipated that making budget was allocated, there was less allocation vari-ety in the
broad, shallow cuts to many alternatives would involve contracting condition (M = 4.00) than in the expanding
greater feelings of loss than making focused, deep cuts to a condition (M = 4.65; = –.65, t(412) = –2.10, p =
few alternatives. However, there was no difference in .04). However, when the initial budget had not been allo-
expected general difficulty of implementing the two strate- cated, allocation variety in the contracting budget condition
gies. This suggests that the budget contraction effect stems (M = 4.84) was not directionally lower than allocation vari-
not from a difference in expected effort of executing the ety in the expanding condition (M = 4.77; = .07, t(412) =
two strategies but from a difference in the expected .24, p = .81). In addition, for those experiencing an expand-
negative psychological experience of implementing them,
ing budget trajectory, allocation variety in the no prior allo-
in line with a loss aversion account.
Experiment 4 examines directly whether reference quan- cation condition (M = 4.77) did not differ from that in the prior
allocation condition (M = 4.65; = –.12, t(412) = –.39, p = .69).
tities are necessary to produce the budget contraction effect.
However, in the contractingcondition, there was a significant
Specifically, the experiment tests the critical role of the per- difference between the no prior allocation condi-
346 JOURNAL OF MARKETING RESEARCH, JUNE
2015 (but shallowly) across many items. Support for this
Figure 4 avoid-ance of anticipated losses comes from Experiments
EXPERIMENT 4: NUMBER OF GROCERY ITEMS PURCHASED We
3b and 4. show that the budget contraction effect is a
BY CONDITION AT $80 BUDGET causal influence of budget trajectory on the amount of
variety in one’s allocation set. We can make this strong
causal claim because of our experimental designs, in which
participants were randomly assigned to experience either an
4.90 4.84
4.77 expanding or a contracting budget trajectory.
It is important to understand the influence of budget tra-
4.70 4.65
jectory because even in stable economic times, millions of
U.S. households experience a negative budget shock in any
4.50 given year. The role of budget trajectory (as opposed to
income trajectory) on allocation variety might seem a bit
4.30 academic at first, but we believe that allocation variety is the
right place to start for two reasons. First, demand mod-els
4.10 4.00 typically presume that income effects on demand are
symmetric for budget expansions and contractions. Our results
3.90 instead imply that they are not symmetric. That is, our results
suggest that income elasticities for particular products are
3.70 likely to be different when budgets expand than when they
contract. Second, the effect of budget trajectory may also
3.50
influence the exact composition of consumer choice sets. For
Yes Prior Allocation No example, under budget contraction, multi-pack cereals may be
less popular at breakfast, and cities containing multiple
Budget expanding Budget contracting activity options may be less popular on tours. Speculating on
and exploring the nature of this influ-ence is likely to be a
tion (M = 4.00) and the prior allocation condition (M = 4.84; = fruitful avenue for research.
–.84, t(412) = –2.71, p < .01), confirming that the bud-get
contraction effect stems from the contracting budget In an attempt to test and understand the budget contrac-
condition. tion effect, we relied on consumers’ expected utility (e.g.,
. These data show that the budget contraction Loewenstein, O’Donoghue, and Rabin 2003) regarding the
Discussion decisions they make, rather than the actual experienced
effect depends on whether allocations to a given set of alter- util-ity that follows from consumption. Similarly, we
natives were made with a prior reference allocation level in explored the choices consumers actually make, rather than
mind, adding support to the notion that the budget contrac-tion the choices they should make. To better understand the
effect stems at least in part from feelings of loss of reducing down-stream consequences of the budget contraction effect
items. When a set of items was not previously selected, on consumer welfare, future studies might explore the
allocation variety was insensitive to budget trajec-tory. This actual experienced utility in contexts similar to those we
result indicates that feelings of loss are not associ-ated with present herein. Doing so could contribute to a better
making cuts to those items, and so there is no need to focus understanding of what decisions would help consumers
cuts narrowly. The data in this experiment also help us rule out maximize their experienced utility.
a possible drive to simplification (and, thus, less variety) in All the experiments used tightly controlled between-
response to worsening prospects, because alloca-tion variety subject designs, which measure changes in allocation
did not drop under worsening prospects when there was no variety across adjacent allocations. It remains to be seen if
the contraction effect is strong enough to compel a given
initial allocation from which to adjust.
consumer to opt for a less varied assortment at time t + 2
GENERAL DISCUSSION with a budget B than at time t with the same budget (having
Theoretical and Managerial Implications had a larger budget at time t + 1) . For example, if a
The experiments demonstrate an asymmetry in budget consumer allocates $40 across a product set, then allocates
expansion and contraction paths, with consumers arriving at a $80 across the same set, and then allocates $ 40 again
across the same set, will the original $40 allocation have
particular budget from a higher initial budget selecting fewer
greater variety than the final $40 allocation?
different types of items than those arriving at the same budget In addition to its theoretical importance, understanding
from a lower initial budget. We found this bud-get contraction
the budget contraction effect might help companies market
effect in grocery item purchases, investment allocations, and
their products. For example, during times of economic
travel budgeting decisions. The results from our experiments
downturn, companies such as Amazon.com may prefer to
suggest that the effect originates from a decrease in allocation
emphasize albums by artists whose other songs consumers
variety when budgets contract rather than from an increase in
allocation variety when budgets expand. The results also already own or focus on specific genres that a particular
reveal that the budget contraction effect stems from a desire to consumer has most likely purchased music from in the past.
avoid the anticipated psycho-logical losses associated with Doing so should be beneficial because such recommenda-
spreading budget cuts broadly tions help consumers in an economic downturn keep their
The Budget Contraction Effect 347
allocations narrow. During times of economic prosperity, Banks, James, Richard Blundell, and Sarah Tanner (1998), “Is
however, it might be beneficial to expand recommendations There
a Retirement- Savings Puzzle?” American Economic
to provide easier access to items that would maximize allo- Review, 88 (4), 769–88.
cation variety. Barsalou, Lawrence W. (1983), “Ad Hoc Categories,” Memory &
An understanding of how the phenomenon can affect Cognition, 11 (3), 211–27.
decision making can also help consumers predict their own Bernheim, B. Douglas, Jonathan Skinner, and Steven Weinberg
(2001), “What Accounts for the Variation in Retirement Wealth
future behavior and perhaps prevent times when, for exam-
Among U.S. Households?” American Economic Review, 91 (4),
ple, choosing a lesser allocation variety during budget con- 832–57.
tractions could have damaging consequences. Diversifying Blanchard, Simon J. and Wayne S. DeSarbo (2013), “A New
an investment portfolio is considered a fundamental rule of Zero-Inflated Negative Binomial Methodology for Latent
prudent investing. During downturns in the economy, how- Category Identification,” Psychometrika, 78 (2), 322–40.
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Geier, Andrew B., Paul Rozin, and Gheorghe Doros (2006), “Unit
The budget contraction effect introduced in this article is Bias a New Heuristic That Helps Explain the Effect of Portion
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elsewhere. Because individual budget contractions are more ——— and Frederic S. Mishkin (1982), “The Sensitivity of Con-
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narrower in their choice sets and to allocate their budgets to
Jappelli, Tullio and Luigi Pistaferri (2010), “The Consumption
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particularly important time for brands to reinforce 15739.
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We argue that the budget contraction effect occurs Varying Context,” Journal of Consumer Research, 11 (1), 528–
because consumers make choices by considering not only 41.
the utility they expect to receive from the items they select Kahn, Barbara E. and Rebecca Ratner (2005), “Variety for the
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Journal of Marketing Research, 26 (August), 299–310.
Ariely, Dan, Joel Huber, and Klaus Wertenbroch (2005), “When Loewenstein, George, Ted O’Donoghue, and Matthew Rabin
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Imagine that you won a $40 ($120) shopping spree at Costco. It couldn’t have come at a
better time because you have very little to eat in the house. Suppose you could spend the money
on the items below. How would you spend it? Use the lines to the left of each item to indicate
how many of each product you would buy. If you would not buy a product, leave the line empty.
— Page Break —
Now imagine that a month has passed and you won another Costco shopping spree from
work. All the food you bought last time is all gone. This time the spree is for $80 ($80). Again it
comes at a good time because you have almost no food in the house. How would you spend the
$80? Use the lines to the left of each item to indicate how many of each product you would buy.
— Page Break —
Imagine that you won a $120 ($40) shopping spree at Costco. It couldn’t have come at a
better time because you have very little to eat in the house. Suppose you could spend the money
on the items below. How would you spend it? Use the lines to the left of each item to indicate
how many of each product you would buy. If you would not buy a product, leave the box empty.
retirement. The new plan involves giving people money to invest as they wish for retirement.
Each month you will be given an amount of money by the government and you can invest it
across four different classes of investments (very safe, safe, somewhat risky, very risky). If you
wish, you can put it all in one investment or you can spread it around as you wish. In the first
month of the plan, the government is allocating you $500 ($1,500) to invest. How would you
— Page Break —
The government has decided to up (drop) the allocation amount for this month. This
month they are giving people $1,000 ($1,000) to invest. How would you allocate this money
— Page Break —
The government has decided to up (drop) the allocation amount again this month. This
month they are giving people $1,500 ($500) to invest. How would you allocate this money
Suppose that you have won a trip to Western Europe. The trip will pay for your travel for
up to three weeks. Given your commitments here, you only have time to travel for one week.
Indicate how you would allocate your 7 (21) days of travel across the cities below. Note that to
visit a city, you must allocate at least one day to that city.
[0] Amsterdam, [0] Lisbon, [0] London, [0] Madrid, [0] Marseilles, [0] Milan, [0]
Munich, [0] Naples, [0] Paris, [0] Prague, [0] Rome, [0] Vienna
— Page Break —
Now suppose that some of your commitments here have freed up, allowing you to
travel for two weeks (require that you limit your travel to just two weeks). Indicate how you
would allocate your 14 (14) days of travel across the cities below. Note that to visit a city, you
[0] Amsterdam, [0] Lisbon, [0] London, [0] Madrid, [0] Marseilles, [0] Milan, [0]
Munich, [0] Naples, [0] Paris, [0] Prague, [0] Rome, [0] Vienna
— Page Break —
Now suppose that all of your commitments here have freed up, allowing you to travel for
the full three weeks (require that you limit your travel to just one week). Indicate how you would
allocate your 21 days of travel across the cities below. Note that to visit a city, you must allocate
[0] Amsterdam, [0] Lisbon, [0] London, [0] Madrid, [0] Marseilles, [0] Milan, [0]
Munich, [0] Naples, [0] Paris, [0] Prague, [0] Rome, [0] Vienna
Experiment 4: Budget Contraction Grocery Stimuli, No Allocation on First Budget
Expanding (Contracting) Condition/with Allocation
Imagine that you won a $40 ($120) shopping spree at Costco. It couldn’t have come at a
better time because you have very little to eat in the house. Suppose you could spend the money
on the items below. How would you spend it? Use the lines to the left of each item to indicate
how many of each product you would buy. If you would not buy a product, leave the box empty.
— Page Break —
Now imagine that a month has passed and you won another Costco shopping spree from
work. All the food you bought last time is all gone. This time the spree is for $80 ($80). Again it
comes at a good time because you have almost no food in the house. How would you spend the
$80? Use the lines to the left of each item to indicate how many of each product you would buy.
Imagine that you won a $40 ($120) shopping spree at Costco. It couldn’t have come at a
better time because you have very little to eat in the house. Suppose you could spend the money
on the items below. Take a moment to read the items and their prices. When you have done so,
— Page Break —
Now imagine that a month has passed and you won another Costco shopping spree from
work. All the food you bought last time is all gone. This time the spree is for $80 ($80). Again it
comes at a good time because you have almost no food in the house. How would you spend the
$80? Use the lines to the left of each item to indicate how many of each product you would buy.