Mental accounting and outcome contiguity in consumer-borrowing decisions

Research indicates that decisions are affected by how outcomes are framed. Mental accounting is a type of framing in which individuals are hypothesized to form psychological accounts for the costs and benefits of outcomes. Prior research has focused on mental accounting′s consequences rather than its determinants. Thus, little is known about the processes that underlie mental accounting. This study investigates the role that temporal contiguity (the co-occurrence of multiple outcomes) plays in mental accounting for consumer-borrowing decisions. Thaler′s (1985) extension of Kahneman and Tversky′s (1979) Prospect Theory was used to predict that consumers will prefer to finance purchases of goods with loans whose terms correspond with the life of the good. The results of four experiments involving 131 MBA students provide support for this prediction. The present study adds to our knowledge of mental accounting by examining the effect of temporal contiguity in the domain of multi-period costs and benefits. It also adds to the consumer behavior literature by examining an important factor affecting debt utilization.