Do consumers prefer 1 percent interest over 0 percent interest or is zero simply confusing?

Nov 15, 2010

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 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.

Explore further: World population likely to peak by 2070

More information: Mauricio M. Palmeira. "The Zero-Comparison Effect." Journal of Consumer Research: June 2011. For further information, see ejcr.org

add to favorites email to friend print save as pdf

Related Stories

Credit Card Users With Highest Balances Pay Lowest Rates

Jun 20, 2005

People who hold credit cards with the lowest interest rates are not the ones you might expect – they're the borrowers who carry the highest credit card debt, according to new research. The assumption has been that cre ...

Interest rate shock could kick-start stock exchange

Aug 04, 2009

Norges Bank surprised most experts by cutting the interest rate by as much as 1.75 percentage points during the final interest rate meeting in 2008. Surprise interest rate changes like this, so-called interest rate shocks, ...

ND Expert: Fed’s rate cut risky for future

Jan 23, 2008

With the biggest one-day reduction of interest rates in history announced Tuesday, the Federal Reserve’s attempts to resuscitate the U.S. economy could be a mistake, according to University of Notre Dame economist Nelson ...

Consumers and their rights: A new study from Australia

May 18, 2010

Consumers tend to be cynical about the motivations of credit card companies, yet they lack the time or motivation to engage in political action to protect their rights, according to a new study in the Journal of Consumer Re ...

Recommended for you

World population likely to peak by 2070

18 hours ago

World population will likely peak at around 9.4 billion around 2070 and then decline to around 9 billion by 2100, according to new population projections from IIASA researchers, published in a new book, World Population and ...

Bullying in schools is still prevalent, national report says

18 hours ago

Despite a dramatic increase in public awareness and anti-bullying legislation nationwide, the prevalence of bullying is still one of the most pressing issues facing our nation's youth, according to a report by researchers ...

Study examines effects of credentialing, personalization

22 hours ago

Chris Gamrat, a doctoral student in learning, design and technology, recently had his study—completed alongside Heather Zimmerman, associate professor of education; Jaclyn Dudek, a doctoral student studying learning, design ...

Data indicate there is no immigration crisis

Oct 22, 2014

Is there an "immigration crisis" on the U.S.-Mexico border? Not according to an examination of historical immigration data, according to a new paper from Rice University's Baker Institute for Public Policy.

User comments : 0