Journal of Economic Psychology 27 (2006) 571–588 www.elsevier.com/locate/joep The role of mental accounting in consumer credit decision processes
Rob Ranyard ¤, Lisa Hinkley 1, Janis Williamson z, Sandie McHugh
Department of Psychology and Life Sciences, University of Bolton, Deane Road, Bolton BL3 5AB, UK
Received 22 March 2005; received in revised form 24 October 2005; accepted 7 November 2005
Available online 8 February 2006

Abstract
The role of mental accounts in consumer credit decision making was investigated. First, in a conversation-based process-tracing study, 96 adults with experience of credit were presented with minimal descriptions of three instalment credit options in realistic consumer scenarios. They chose a credit option and a repayment plan, but before doing so could request further information. When choosing the source of credit, participants usually sought and compared information on Annual Percentage Rate (APR) or total cost (TC), often using simple decision heuristics. When choosing repayment plans, they frequently asked about, and made trade-oVs between, monthly repayment amounts,
TC, and loan duration. Second, in an independent groups experiment, TC and APR information were systematically varied. Participants chose from pairs of repayment plans conXicting in loan duration and monthly repayment amount (N D 28). Although APR signiWcantly inXuenced choice, its eVect was substantially moderated by TC information. It was concluded that (i) although APR is an important attribute for source of credit decisions, TC is more important for repayment plan decisions, since consumers often represent speciWc credit plans in terms of total mental accounts; and (ii) recurrent budget period accounts are used to evaluate monthly repayments and anticipate future goals and hazards.
© 2006 Elsevier B.V. All rights reserved.
JEL classiWcation: D14; D91
PsycINFO: 2340; 3920

*
1
z

Corresponding author.
E-mail address: R.Ranyard@bolton.ac.uk (R. Ranyard).
Present address: Department of Psychology, Oxford Brookes University.
Deceased on 18th of July 2000 at the age of 42.

0167-4870/$ - see front matter © 2006 Elsevier B.V. All rights reserved. doi:10.1016/j.joep.2005.11.001 572

R. Ranyard et al. / Journal of Economic Psychology 27 (2006) 571–588

Keywords: Consumer credit; Decision making; Mental accounting; Information search; Decision strategy

1. Introduction
A number of surveys have investigated factors underlying the use of consumer credit, from Katona’s studies of the 1950s, to the current monitoring of credit and debt in certain waves of the British Household Panel Survey (Berthoud & Kempson, 1992; BHPS, 2002;
Katona, 1975; OYce of Fair Trading, 1988, 1994; Viaud & Roland-Levy, 2000). There has also been research on the negative aspects of credit, i.e., default and debt. Although much of this appropriately emphasises the importance of social and economic factors, the contribution of psychological factors has also been identiWed (Ford, 1988; Lea, 1999; Nyhus &
Webley, 2001; Webley & Nyhus, 2001). An important element in understanding routes into default and debt is the quality and nature of initial decisions to take credit. However, there have been relatively few studies of the psychology of this decision process (Hirst, Joyce, &
Schadewald, 1994; Prelec & Loewenstein, 1998; Soman & Cheema, 2002). Moreover, the only previous study of preferences for diVerent instalment credit options seems to be those of Hirst et al. and Ranyard and Craig (1995).
Ranyard and Craig (1993, 1995) developed the mental accounting concepts of Tversky and Kahneman (1981; Kahneman and Tversky, 1984) and Thaler (1985, 1999; Shefrin and
Thaler, 1988) and proposed a dual mental account model of how consumers perceive and evaluate instalment credit. They did not, however, directly investigate the decision process itself, or relationships between decision strategies and mental accounting. The present article describes two studies of credit