Featured Research

from universities, journals, and other organizations

Do consumers prefer one percent interest over zero percent interest or is zero simply confusing?

Date:
November 15, 2010
Source:
University of Chicago Press Journals
Summary:
Why would someone choose a credit card with a one percent interest rate over another with a zero percent rate? A new study finds that consumers are often flummoxed when it comes to zero.

Why would someone choose a credit card with a one percent interest rate over another with a zero percent rate? A new study in the Journal of Consumer Research finds that consumers are often flummoxed when it comes to zero.

"A reasonable assumption is that a product will be more attractive when it offers more of a good thing, such as free pictures (with a digital camera purchase), or less of a bad thing, like interest rates on a credit card," writes author Mauricio Palmeira (Monash University, Australia). But Palmeira's research found that consumer comparison methods tend to get confused when one of the comparison terms has a zero value.

For example, a consumer interested in a new credit card may need to choose between one with a $45 annual fee and a one percent interest rate and another with a $15 fee and a 20 percent interest rate. "One could view this decision as a choice between an extra $30 annually for a 19 percent reduction in interest rate. Alternately, it can be viewed in relative terms. In this sense, a $30 difference between $15 and $45 appears much bigger than the same difference between $115 and $145," writes Palmeira. Consumers tend to be more sensitive to relative rather than absolute differences, which is why a one percent interest rate looks good, since its interest rate is 20 times less than 20 percent.

But what if consumers compare a 20 percent interest rate to a zero percent one? "I argue that whereas a 20 percent interest rate may look very large compared to one percent (it is 20 times larger!), it may not look as large compared to zero percent. Zero eliminates the reference point we use to assess the size of things," Palmeira explains.

"This leads to a counterintuitive situation, in which a credit card can increase its likelihood of being selected when it has a small but non-zero interest rate," writes Palmeira. The same is true of other attributes that consumers want to minimize, like interest rates and fat content.

The inverse is true when consumers desire an attribute. For example, if a digital camera offers a promotion that adds 200 free pictures to a purchase, a competitor may be better off offering nothing rather than just a few free pictures. "This is because 200 will look larger compared to 10 or 20 than compared to zero," Palmeira writes.


Story Source:

The above story is based on materials provided by University of Chicago Press Journals. Note: Materials may be edited for content and length.


Journal Reference:

  1. Mauricio Palmeira. The Zero-Comparison Effect. Journal of Consumer Research, June 2011 DOI: 10.1086/657998

Cite This Page:

University of Chicago Press Journals. "Do consumers prefer one percent interest over zero percent interest or is zero simply confusing?." ScienceDaily. ScienceDaily, 15 November 2010. <www.sciencedaily.com/releases/2010/11/101115151940.htm>.
University of Chicago Press Journals. (2010, November 15). Do consumers prefer one percent interest over zero percent interest or is zero simply confusing?. ScienceDaily. Retrieved October 22, 2014 from www.sciencedaily.com/releases/2010/11/101115151940.htm
University of Chicago Press Journals. "Do consumers prefer one percent interest over zero percent interest or is zero simply confusing?." ScienceDaily. www.sciencedaily.com/releases/2010/11/101115151940.htm (accessed October 22, 2014).

Share This



More Science & Society News

Wednesday, October 22, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

CDC Revamps Ebola Guidelines After Criticism

CDC Revamps Ebola Guidelines After Criticism

Newsy (Oct. 21, 2014) The Centers for Disease Control and Prevention have issued new protocols for healthcare workers interacting with Ebola patients. Video provided by Newsy
Powered by NewsLook.com
Robots to Fly Planes Where Humans Can't

Robots to Fly Planes Where Humans Can't

Reuters - Innovations Video Online (Oct. 21, 2014) Researchers in South Korea are developing a robotic pilot that could potentially replace humans in the cockpit. Unlike drones and autopilot programs which are configured for specific aircraft, the robots' humanoid design will allow it to fly any type of plane with no additional sensors. Ben Gruber reports. Video provided by Reuters
Powered by NewsLook.com
WHO: Ebola Vaccine Trials to Start a in January

WHO: Ebola Vaccine Trials to Start a in January

AP (Oct. 21, 2014) Tens of thousands of doses of experimental Ebola vaccines could be available for "real-world" testing in West Africa as soon as January as long as they are deemed safe in soon to start trials, the World Health Organization said Tuesday. (Oct. 21) Video provided by AP
Powered by NewsLook.com
Urgent-Care Clinics Ill-Equipped to Treat Ebola

Urgent-Care Clinics Ill-Equipped to Treat Ebola

AP (Oct. 21, 2014) Urgent-care clinics popping up across the US are not equipped to treat a serious illness like Ebola and have been told to immediately call a hospital and public health officials if they suspect a patient may be infected. (Oct. 21) Video provided by AP
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:

Strange & Offbeat Stories


Science & Society

Business & Industry

Education & Learning

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins