When it comes to evaluating the cumulative savings of discounts over time, people often choose the least financially beneficial option and miss out on potential savings, according to research from the WSU Carson College of Business and the University of Kentucky’s Gatton College of Business and Economics.
Kunter Gunasti, assistant professor of marketing at WSU, and Haipeng Chen, professor of marketing at the University of Kentucky, conducted three studies looking at how people interpret cumulative discounts. The findings are published online in the Journal of Consumer Psychology.
“We found most people are notoriously bad when it comes to accurately calculating cumulative savings or expenses over a period of time,” Gunasti, the lead researcher, said.
Researchers refer to this bias as cumulative impact neglect of changes that are sequential, or CINCS. People typically focus on the naïve totals, or the trends of numbers which, on their own, lead to incorrect assumptions.
For example, consumers find a 40% off, plus an extra 25% off discount more enticing than an economically equivalent discount of 55% off because they rely on naïve totals formed by directly adding the raw percentage.
“Once dollar amounts are provided, consumers can easily tell that $40 off a $100 purchased followed by an additional $15 off is the same as $55 off a $100 purchase. Both scenarios provide the same savings, and consumers should be indifferent between the two. Adding a time component, however, changes everything.”
To illustrate further, when asked whether they would prefer to receive $40 off their rent this month followed by an additional $15 next month or would they rather have $55 off their rent next month, most people prefer the latter. In fact, the former leads to total savings of $95, as $15 gets added onto $40 next month in accumulated savings. Thus, it is a better deal than only having a $55 savings next month.
“CINCS bias can mislead people even when absolute dollar values are provided because they pay more attention to the naïve totals rather than the accumulated savings over time,” Gunasti said.
Gunasti said people often choose poorly because the alternative just doesn’t feel right. Being aware of the CINCS bias can lead to better financial decision-making.
“Awareness of the bias can prompt consumers to slow down and more carefully evaluate the choices in front of them,” Gunasti said.