Ryan Hamilton, assistant professor of marketing, explores how creating a budget can actually result in overspending. In a recent article Hamilton and a colleague, Jeff Larson, Brigham Young University, discuss the findings of their research.
Below is an excerpt taken from CardHub.com.
Roughly 57% of U.S. consumers do not maintain a budget, according to the National Foundation for Credit Counseling. While conventional wisdom suggests that these folks risk overspending as well as poor overall money management, a recent study by a pair of researchers from Brigham Young University and Emory University, offers a somewhat different perspective.
The study, aptly titled “When Budgeting Backfires,” analyzed the way in which our spending habits change when we establish a maximum price to pay before going out to buy a given product. The researchers – Ryan Hamilton and Jeff Larson, who are assistant professors of marketing at Emory and BYU, respectively – conducted a series of consumer surveys in which they asked members of two separate groups to select an item to purchase in a given category of goods, after first directing one of the groups to determine what they’d aim to spend in real life. They found that the group with “salient price restraints” tended to opt for higher priced, higher quality goods.
For example, when the product in question was ballpoint pens, 38.6% of the people without a budget in mind opted for a pen costing more than $0.99, compared to 58.5% of the folks who established a target amount beforehand. When TVs were used, 31.3% of non-budgeters selected the higher priced option, while 54.5% of budgeters did so.
How could that be? Don’t these findings contradict the very value proposition of budgets?
Well, it seems that the process of budgeting can actually throw off the typical value-to-price balance that consumers naturally employ when shopping.
“The reason setting a price restraint can sometimes backfire is because deciding on an acceptable price level first partitions the choice into two stages: first price, then everything else aside from price,” Hamilton told Card Hub. “In a typical decision, we trade-off between price and quality. When we settle on a price level first (e.g., no more than $200), then we disrupt the normal process of making tradeoffs. We’ve already decided that options priced below the limit are acceptable. So how do we decide among those options? We use the remaining non-price attributes, like quality, to help us make a final choice. The result is we are more likely to choose a higher priced, higher quality option than if we had not set the price restraint in the first place.”
– John Kiernan