ASSOCIATION FOR CONSUMER RESEARCH Association for Consumer Research, University of Minnesota Duluth, 115 Chester Park, 31 West College Street Duluth, MN 55812 An Under-Shooting Bias in Asymmetric Resource Problems Christopher Hsee, University of Chicago, USA Xilin Li, University of Chicago, USA Ying Zeng, University of Chicago, USA Alex Imas, Carnegie Mellon University, USA People are often faced with choices between accounts or options with more and fewer resources. We introduce a Two-Account Game to study asymmetric resource-competition problems and discover a systematic under-shooting bias. People tend to choose fewer- resource options, partly because they incorrectly assume others will choose the option with more resources. [to cite]: Christopher Hsee, Xilin Li, Ying Zeng, and Alex Imas (2019) ,"An Under-Shooting Bias in Asymmetric Resource Problems", in NA - Advances in Consumer Research Volume 47, eds. Rajesh Bagchi, Lauren Block, and Leonard Lee, Duluth, MN : Association for Consumer Research, Pages: 232-236. [url]: http://www.acrwebsite.org/volumes/2551957/volumes/v47/NA-47 [copyright notice]: This work is copyrighted by The Association for Consumer Research. For permission to copy or use this work in whole or in part, please contact the Copyright Clearance Center at http://www.copyright.com/. Wise and Foolish Consumer Financial Decisions Chair: Kellen Mrkva, Columbia University, USA Paper #1: A Structural Test of Mental Accounting and Consumer which causes them to choose cards that accumulate higher fees. Fi- Fungibility From Credit Card Expenditures nally, Hsee, Li, Zeng, and Imas examine how people allocate money Nicholas Pretnar, Carnegie Mellon University, USA when there are multiple accounts, some with more resources than Christopher Olivola, Carnegie Mellon University, USA others. They find that people allocate too much toward smaller ac- Alan Montgomery, Carnegie Mellon University, USA counts. The potential audience for this session is broad. Though the Paper #2: Minimum Payments Alter Debt Repayment Strategies talks focus on consumer financial decision making and credit cards, Across Multiple Credit Cards it will be interesting to many. For example, three of the papers cover Abigail Sussman, University of Chicago, USA a novel heuristic or bias in decision making, several are rooted in be- Samuel Hirshman, University of Chicago, USA havioral economics, several use big data, some focus partly on time Paper #3: Searching, Fast and Slow: How Time Preferences preferences and intertemporal choice, two have clear policy implica- Influence Credit Card Search and Choice tions, one examines consumer search and information processing, Kellen Mrkva, Columbia University, USA and one has direct relevance for researchers who study perspective- Elizabeth C Webb, Columbia University, USA taking and economic games. Eric J Johnson, Columbia University, USA All talks are based on papers in the late stages of development. Paper #4: An Under-Shooting Bias in Asymmetric Resource All four papers are either currently being prepared or will soon be Problems prepared for submission to A journals. Christopher Hsee, University of Chicago, USA Xilin Li, University of Chicago, USA A Structural Test of Mental Accounting and Consumer Ying Zeng, University of Chicago, USA Fungibility from Credit Card Expenditures Alex Imas, Carnegie Mellon University, USA EXTENDED ABSTRACT SESSION OVERVIEW The theory of mental accounting suggests that consumers treat Americans hold over $800 billion in credit card debt. The aver- different sources of money and different expenditures differently age cardholder owns four credit cards, often with high interest rates (Thaler 1999). One implication of mental accounting is that consum- that can cause debt to spiral out of control. Some people even hold ers may be more likely to spend with credit cards than with cash or high-interest credit card debt and savings simultaneously, a tendency debit (e.g., Prelec and Simester 2001), particularly for durable goods called “the credit card debt puzzle,” which can be extremely harm- purchases (Prelec and Loewenstein 1998). Under this theory, in- ful. Understanding how consumers use credit cards and the processes creasing the credit limit on a consumer’s credit card should increase that lead consumers to accumulate excessive debt is of paramount his/her consumption, regardless of whether his/her income or wealth importance. The difference between wise and foolish decision mak- also increased. ing in this high-stakes domain can be the difference between finan- We test this prediction using a unique dataset of linked credit cial security and financial turmoil. and debit card users. Our analysis adds to the literature on mental How do consumers pick among the many credit cards available accounting theoretically, by deriving a measure of fungibility with to them? How do people determine which debts to pay off first? What regards to credit and debit card usage directly from a consumer’s factors make people more likely to pay off debt? structural consumption/savings problem. It also adds to previous The papers in this session will help answer these questions. In theorizing empirically by using linked household credit/debit card so doing, they will advance the field’s understanding of consumer field data from a large North American bank to show that consumers financial decision making, as well as our understanding of the heu- behave in ways consistent with mental accounting. ristics, biases, and strategies people use more generally. Though the We construct a theoretical, economic utility maximization talks focus on consumer financial decision making and credit card model that allows different consumers to exhibit different degrees decisions in particular, there is also a diversity of topics that will of fungibility. Specifically, we incorporate the mental accounting make this symposium interesting to a broad audience. concept of partitioned ex-ante and ex-post budgeting by splitting the In the first paper, Olivola, Pretnar, and Montgomery use data household budget constraint into separate constraints for each liquid- from a large North American bank with over 3 million observations ity category and then allowing consumers to choose shares of con- to examine factors that help or harm consumers’ ability to make debt sumption for different commodities out of different liquidity sources. repayments. They show that some factors, including whether con- Specifically, we focus on credit card verses debit card expenditure, sumers buy a durable rather than non-durable good, impact debt bal- though the model is general enough to admit many more liquidity ances long-term. sources by simply adding a new constraint. Among other things, the In the second paper, Hirshman and Sussman demonstrate that model reconciles a heretofore unsolved problem in mainstream eco- minimum payments can interfere with people’s ability to make wise nomics known as “the credit card debt puzzle,” wherein consumers debt repayment decisions. Minimum payments make people less simultaneously save and carry interest-bearing credit card debt (see likely to choose the optimal strategy of paying off debt from higher- Telyukova 2013; Telyukova and Wright 2008). Depending on indi- interest credit cards first, even though most people are aware that vidual consumers’ innate aversion to holding debt, an individual may paying off high-interest debt first is the best strategy. or may not simultaneously save and carry interest-bearing debt. This In the third paper, Mrkva, Webb, and Johnson focus on how preference-based explanation allows us both to solve the puzzle and people choose a credit card. They find that impatient, present-biased reconcile the vast degree of heterogeneity observed in the data with individuals are less willing to search for the optimal credit card, regards to savings and debt-accumulating behavior. Advances in Consumer Research 232 Volume 47, ©2019 Advances in Consumer Research (Volume 47) / 233 Using the equilibrium fungibility condition, we empirically test We draw on lab and field data to provide evidence that people whether the median consumer unit (i.e., household) in our sample are knowledgeable that they should repay their highest interest rate exhibits perfect fungibility with respect to credit and debit card ex- debts first. Furthermore, borrowers do prioritize these debts to some penditure. We find that the median consumer behaves as if receiving degree. In addition, we document a dispersion effect of minimum $1 in additional credit is equivalent to receiving $2.03 in additional payments. That is, minimum payments reduce participants likeli- cash in terms of marginal consumption value. A statistical test shows hood of repaying optimally by leading them to spread their discre- that the median consumer is thus significantly non-fungible with re- tionary repayments (i.e., payments above the minimum) across more gards credit verses debit card expenditure. However, the distribution accounts than those without minimum payments. We find that this of this trait varies substantially across consumers: 59% of our sample strategy change persists after accounting for the tendency to target behave as if the consumption value of credit is higher than that of minimum payment amounts (Stewart 2009), and we do not find cash, whereas the other 41% behave in the opposite manner. evidence supporting widespread use of heuristics based on balance Our structural model of fungibility can be used to better un- amount.