Payment Method Design: Psychological and Economic Aspects of Payments

Paying for goods and services creates disutility for the payer. Based on ideas from behavioral economics, we contend that the disutility of paying can be substantially influenced by the method of payment. We develop a model of the consumer that takes into account phenomena such as the pain of paying, the sunk-cost effect, and self-control issues. In a laboratory experiment we test this model and the relative magnitudes of these different psychological effects: pain of paying is separated out using a micro-payment method (small payments that require specific confirmation), sunk cost is gauged by comparing the effect of pre-payment with post-payment, and the desire for self control is ascertained using stated preference across different payment methods. The experimental results showed that the pain of paying has a substantial influence on payment, and to a lesser degree so does the sunk cost effect. Subjective preferences for the different payment-methods indicated that respondents are generally aware of the aversiveness of payment, yet are not concerned with selfcontrol.