Mental Budgeting and Consumer Decisions

TLDR

Consumers set category budgets and track spending, but imperfect budgets can cause over‑ or underconsumption. The study investigates how budgeting influences consumption, especially for purchases that are highly typical of a category. The authors conduct three studies showing that budgeting effects are larger for purchases that are highly typical of their category. Three studies find that budgeting leads to underconsumption, reduces spending on typical items, blocks other purchases, and improves predictive power beyond standard economic theory.

Abstract

Consumers often set budgets for categories of expenses (e.g., entertainment) and track expenses against their budget. Because budgets cannot perfectly anticipate consumption opportunities, people may earmark too much or too little money for a particular category. This leads them to overconsume or underconsume goods in that category. The results of three studies suggest that consumers do indeed set budgets and that budgeting may lead to underconsumption. To show that consumers track expenses, the studies demonstrate that budgeting effects are larger for purchases that are highly typical of their category. Such purchases reduce the amount people spend in a category and block the purchase of other typical items. The studies control for satiation and income effects; thus, budgeting adds predictive power to standard economic consumer theory.