Price Attractiveness and Price Complexity: Why People Prefer Level-Payment Loans.

Yang Lu,Haoya Huang,Jian Wang,Xintian Zhuang,Chenyang Li

doi:10.3389/fpsyg.2021.532696

Abstract

The improving sequence effect suggests that in choices between a rising earning and any other sequences, participants prefer the rising earning. Recent studies show that the improving sequence effect also exists in a loan context. As consumers have a strong preference for falling loan profiles, banks may consider to offer loans in which the loan repayments concentrate at the beginning of the loan term. In this paper, we examined the improving sequence effect in context of a car loan with three repayment plans expressed in temporally reframed prices (TRP). By regressing the evaluation of loan profiles on the perceived price attractiveness, price complexity, TRP and the interaction terms, we find that (1) the perceived price attractiveness and price complexity significantly predict the loan evaluation, and they also explain a significant proportion of variance in loan evaluation; (2) the TRP effect interacts with the improving sequence effect. Specifically, with the introduction of TRP, respondents prefer constant profiles over falling profiles. TRP may explain why level-payment loans are still popular in real world, though the improving sequence effect suggests otherwise.

Highlights

Introduced by Samuelson (1937), the Discounted Utility Model has been widely used to evaluate present utility of future rewards
The result indicates that the constant profile is perceived to be less complex only when the loan profiles are expressed in a perday form
Previous studies have shown a consistent preference for the falling sequence in loan repayment plans, suggesting that banks need to develop loan schemes in which the repayments are concentrated at the beginning of the loan term

Summary

Introduction

Introduced by Samuelson (1937), the Discounted Utility Model (hereinafter, DUM) has been widely used to evaluate present utility of future rewards. According to the DUM, individuals would prefer falling sequences over rising sequences when evaluating positive future rewards, i.e., individuals prefer rewards received in an decreasing sequence rather than increasing, whilst the total amount of the rewards stays the same. This is because the rewards in a falling sequence concentrate at the beginning of the period, and have greater present value than that of a rising sequence of rewards with equal total amount. For positive series of future rewards such as incomes, restaurant visits, leisure activities or other gains, the preference for improvement means that individuals prefer to start with the least attractive outcome and end with the most attractive outcome than the opposite, i.e., they prefer

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