Abstract
Studies show that consumers are often unaware of the price of their purchases. We examine whether such ignorance may be willful. We develop a model entailing consumers who may feel conflicted about spending—some people have an inherent preference for overspending (“spendthrifts”). We show that if overspending causes regret, spendthrifts are better off in the short-term from ignoring costs to their consumption (i.e., prices), when ignorance reduces anticipated regret. In the long-term, ignorance of costs may, however, be harmful, since it acts to exacerbate spendthrifts’ overconsumption. Further, our model shows that consumers who are unconflicted about their spending, or have an inherent preference to underspend (“tightwads”), do not benefit from ignoring costs to their consumption in the short-term. We test the implications of our model against two datasets—a field dataset from a supermarket and data from a websurvey entailing a hypothetical experiment. We find support for our model implications that spendthrifts pay less attention to prices, and that their inattention may be endogenous (i.e., willful or strategic). Our results may help explain previous puzzling findings of low consumer price knowledge. Further, our finding that all consumer groups addressed herein have long-term benefits from price saliency provides support for policies that ensure prices are transparent and salient to consumers.
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Notes
Based on survey responses by the subjects, Feldman and Ruffle (2015) conclude the systematic differences in demand responses to added taxes versus rebates are not caused by subjects’ price unawareness or cognitive price computational inabilities. They speculate their findings may be explained by consumers willfully ignoring some or all of the tax. Our study complements the price inattention studies by testing whether willful cost ignorance exists, and what consumer characteristics might explain such ignorance.
Studies examining any potential regret resulting from tightwads’ underspending seem to be lacking. This lack of research may reflect an expectation that regret is less common in tightwads than spendthrifts. Overspending today likely leads to graver future consequences than does underspending. Further, spendthrifts undertake the action to spend, whereas tightwads undertake an inaction by abstaining from (additional) spending. Action, compared to inaction, has repeatedly and consistently been shown to cause higher levels of regret (Kahneman and Tversky 1982; Landman 1987; Gleicher et al. 1990).
In the context of our model, hyperbolic discounting could also generate willful ignorance of costs, given that a consumer who hyperbolically (as opposed to exponentially) discounts future utility may experience a conflict between long-term and short-term spending preferences (O’Donoghue and Rabin 1999, 2003). In other contexts (e.g., preferences for timing of payment) the implications on behavior of pain and paying and time discounting may differ (see e.g., Prelec and Loewenstein 1998; Patrick and Park 2006).
Although we do not formally model the reason for such regret reduction under ignorance, one reason for such reduction in negative emotions is the ability for agents to form “optimal expectations” under ignorance (see e.g., Brunnermeier and Parker 2005; Oster et al. 2013). Specifically, agents may benefit from ignorance of the state they are in, since ignorance enables them to downplay the risk of being in a “bad state,” which in turn reduces negative emotions (anxiety, worry, guilt, regret, etc).
We assume no reduction in pain of paying from ignorance of costs, i.e., pain of paying (for all agents) is unaffected by ignorance. Not knowing costs may make some consumers less worried about costs. Yet it may make some people (e.g., tightwads) more worried, i.e., ignorance may cause tightwads to overestimate the risk of the consumption being high-cost, and hence increase their pain of paying. It does, however, not matter to our general findings if tightwads experience equal, or more, pain of paying under ignorance.
While perhaps more common a few decades ago, priceless restaurant menus still exist (these days oftentimes upon request) in fine-dining restaurants around the world. The reason for these menus is for people not to consider meal prices when someone else in their party pays for the meal. The intent of our priceless menu is, however, that the person who avoids price information still pays for his/her own meal.
Non-vegan/non-vegetarian subjects were asked to choose between the following three meal options: 1. Starter: Fresh tomato and mozzarella salad, entree: Shrimp Scampi pasta, dessert: Dark chocolate pudding, 2. Starter: Bruschetta with goat cheese and roasted pepper, entree: Sliced sirloin steak with mashed potatoes, dessert: Ice-cream cake and fresh berries, and 3. Starter: Seared garlic-lemon scallops, entree: Creamy chicken alfredo with bacon, dessert: Key lime pie. Vegan/vegetarian subjects chose between the following: 1. Starter: Shaved kale and apple salad, entree: Seared seitan cutlets with truffle mashed potatoes, dessert: Sweet rice and coconut pudding, 2. Starter: Smoked tempeh and tomato salad, entree: Roasted vegetables with truffles and quinoa, dessert: Vegan mocha cake, and 3. Starter: Roasted beet and cauliflower salad, entree: Marinated portabella mushrooms and kale with rice, dessert: Soy cheese cake.
Our experimental result of 30% willfully ignorant consumers likely represents a lower bound for the prevalence of willful cost ignorance, since price information in our experiment is entirely costless, which is generally not the case in other consumer contexts. This result is also implied by previous field studies that find as many as half of consumers do not know the price of a recently purchased good, or of an item just added to their shopping cart (Allen et al. 1976; Conover 1986; Dickson and Sawyer 1990). Further, our supermarket data imply over 97% of respondents misperceive their cost of a recent purchase.
Memory could impact our results, given the (albeit short) time lapse between subjects’ checkout from the supermarket and their participation in our study. A considerable body of recent research suggests salience of an attribute (such as self-selected attention to price in our study) improves memory of that attribute (see, e.g., Fine and Minnery 2009; Melcher and Piazza 2011; Santangelo 2015). An asymmetric decline in the recollection of the cost of the purchase just made over tightwads, spendthrifts and unconflicted is therefore likely to originate from heterogeneity in cost inattention, as suggested by our model. An alternative explanation would be that spendthrifts inherently have a worse memory than tightwads. Although we cannot rule that out, we also have no reason to believe that would be the case—we are unaware of any research pointing to spendthrifty consumers demonstrating worse memory. Also, the theory of spendthrifts being more motivated to pay less attention (ignore) costs, compared to tightwads and unconflicted, is supported by the results from our websurvey.
Although not reported here, our supermarket data also suggests there is no significant correlation between over- or under-estimation of the total cost of a purchase just made and spendthriftiness. I.e., we do not find that spendthrifts are more likely to either over- or under-estimate the cost of their recent purchase, compared to tightwad subjects. We only find that spendthrifts are less accurate, i.e., pay less attention to costs. This is also suggested by our theoretical model.
Our results are robust over the aggregation of the education dummy.
In the other regressions from the websurvey, the results are so highly statistically significant that any reduced efficiency of the estimates from including professional degree goes unnoticed. Hence, for the other regressions based on this data, we report models entailing the education categories.
Spendthriftiness in our websurvey is highly correlated with both the self-control measure and frugality scale, in expected ways—spendthriftier subjects have less self-control and are less frugal. This means we can be less certain our observed willful ignorance is explained by spendthriftiness per se—it may be jointly explained by self-control or frugality. Although this does not undermine our general finding of willful price ignorance, it has some implications for how to specify the theoretical model.
Given that search costs are the same both for price information and price ignorance in our websurvey, someone who is completely indifferent between being informed and ignorant may be equally likely to choose ignorance and receive information about prices. To examine whether indifference is the prime motivation for any observed price avoidance, websurvey participants were surveyed on the reasons why they chose, or did not choose, to avoid price information. We surveyed both subjects in the endogenous information and the exogenous treatment, where the latter were faced with the question on whether they would have avoided price information, had they had the option. 107 subjects in the endogenous and exogenous treatments avoided price information, or stated that they would have avoided price information. Subjects could state any or all of the following reasons for avoiding price information: “I would enjoy my meal more if I didn’t have to think of the exact price.”; “Prices would not matter to my meal choice anyway.”; “As long as the price is $50 or below, the price would not matter to my meal choice.”; “I do not know”; or “Other.” The most common answer was “I would enjoy my meal more if I didn’t have to think of the exact price,” which is implied by our theory. This suggests the main reason for avoiding price information in our websurvey is not price indifference. Further, the answer to the previous question is highly correlated with being a spendthrift. If subjects chose the answer “I would enjoy my meal more if I didn’t have to think of the exact price,” the variable Price info reduces enjoyment takes the value 1, otherwise zero. The average marginal effect from a Probit regression, where the dependent variable is Price info reduces enjoyment and the dummy variables unconflicted and spendthrift are the independent variables (tightwad is baseline), shows that spendthrifts are 57.8 percentage points (P value = 0.007) more likely to choose price ignorance for the reason that it would reduce meal enjoyment, than are tightwads. Adding the same series of control variables to the regression as included in preceding regressions slightly increases the average marginal effect (to 61.5%) and decreases the P value to 0.003.
We have examined the sensitivity of all results reported in this section to different cut-off values (on the STTW-scale) for the dummy variables Tightwad, Unconflicted and Spendthrift, as well as estimated all regressions using the STTW-scale, instead of the dummy variables. Our results remain robust.
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Acknowledgments
We thank Hunter Bruce for excellent research assistance. The collection of data from human subjects for this study has been approved by the IRB at University of Wyoming.
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Thunström, L., Jones Ritten, C. Endogenous attention to costs. J Risk Uncertain 59, 1–22 (2019). https://doi.org/10.1007/s11166-019-09308-2
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DOI: https://doi.org/10.1007/s11166-019-09308-2
Keywords
- Strategic ignorance
- Willful ignorance
- Price inattention
- Price transparency
- Price saliency
- Spendthrifts
- Tightwads
- Pain of paying