Obligation, guilt or empowerment? Modelling consumer payment behaviour with a new mental accounting framework

When companies think about new opportunity spaces for growth, they typically think in terms of market size and growth, competitive differentiation, and market accessibility. While these are fundamental factors for consideration, sometimes there are subtler aspects that can tell us how a product or service will be received.

Jonathan Kahan
7 min readJan 22, 2022

This article originally appeared in Designit’s old blog, Matters.

By Jonathan Kahan and Hadas Zucker, with contributions from Ofer Senderey

Predicting installment payment decisions

As behavioural science has thoroughly demonstrated in the past years, humans are irrational animals. Sometimes psychological factors can play a huge role in determining when and how a product is used. This is particularly true for anything that has to do with payment. Payment is intrinsically sensitive — it carries baggage and subtle connotations that can deeply influence our decisions.

We had a chance to explore this topic when working with a recent client, an IPOed Australian company with roots in Israel that provides instalment payment services for e-commerce websites.

Instalment payments have been widespread for many years in countries such as Israel, Brazil and Turkey. Usage for day-to-day and online expenses has seen strong growth around the world as technology and credit card companies are promoting it.

Within this market context, we were hired by our client to identify main avenues for new growth, both in terms of target segments and nailing the key messaging for users.

Our client is one of a few players providing interest-free instalment payments to e-commerce users. They do so by charging a fee to the merchant, who thus has a chance to increase average order value and conversion rate. They are unique in that they rely on the consumer’s existing credit line — instead of having to perform invasive credit score checks- to secure the payment.

Before identifying who the ideal user is for our instalment payment solution, we felt that we needed a good working model for what makes people decide to pay in instalments in the first place.

We conducted qualitative interviews on 12 people across 4 different countries and we asked, among other things, for which amount would they be willing to split payment into installments, considering different products such as a mattress, a car part replacement, an online course, etc.

We saw a pattern emerge in the qualitative results:

  • People with higher disposable income were willing to split into installment only higher amounts. Unless, that is, they scored very high on financial literacy, in which case considerations relating to the time value of money and opportunity cost took over.
  • Products with higher durability were more likely to be purchased in installment: for example, groceries were almost unanimously judged as too “short term” to be paid for in installment.
  • The minimal “thresholds” above which the respondents want to pay in installment are symbolic. Round sums such as 200 or 500 of the local currency were common.

But there was more. Clearly the type of product that was being purchased made a big difference, although respondents could not usually tell why. But we had a guess: mental accounting.

According to Richard Thaler, the Nobel Prize-winning scientist who formulated the theory, “mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities”.

For example, mental accounting is why people keep a special “money jar” or similar fund set aside for a vacation or a new home, while at the same time carrying substantial credit card debt. They are likely to treat the money in this special fund differently from the money that is being used to pay down debt, despite the fact that diverting funds from the debt repayment process increases interest payments, thereby reducing their total net worth.

But how does mental accounting influence how we choose to pay?

The theory

In order to model our users’ decision-making process, we came up with a typology. According to our model, every purchase falls into one of three categories:

  • Necessity expenses: everything you have to buy, one way or another. Rent or mortgage, groceries, and insurance. Also in many cases: children’s products, legal and medical expenses, fines, etc.
  • Leisure expenses: expenses you usually think of as “treats”: that cake you are particularly fond of, that cute coffee table, that watch you really don’t need but is so nice, a new pair of shoes or a jacket.
  • Investments expenses: Things that make you a better person. A course or a degree. A gym subscription or some technical sports equipment. It can also be something life- or personality-altering such as an engagement ring or aesthetic surgery.

It is important to notice that our categories are not product verticals, but rather mental accounting buckets, or, as we started to call them, shopping mindsets.

With this typology in hand, we revisited our data and categorized the answers we received from our respondents on specific products into our shopping mindsets and by product durability — for example, groceries would be a necessity-short durability expense as I will consume it within a few days; medical expenses are necessity-long durability expenses as they impact my long-term health.

We controlled for the income of the respondents by plotting our data on axes showing their income and the price of the product in question.

(L) Investment expenses — The blue trend line represents the “installments threshold”, i.e. the size of the expense above which people of a given income will be willing to pay for a product in installments. (R) Leisure expenses — The blue trend line represents the “installments threshold”, i.e. the size of the expense above which people of a given income will be willing to pay for a product in installments.

The pattern that we saw emerging confirmed many of our assumptions:

  • Wealthier people were indeed more willing to pay in installment only for more expensive products
  • People had a lower installment threshold for long-term necessity expenses and investments — or in other words, they were willing to start paying in installment from a lower amount. On leisure expenses the threshold was higher. On short-term necessity (eg. groceries), even for very high amounts most people were refusing to pay in installment.

We were onto something, but so far we only had a small sample of qualitative data. We launched a survey of 600 people in the US, UK, and Australia to try to validate our theory, presenting our subjects with sample products belonging to each of the mindsets we identified. We then gave them a range of prices, and we asked them for which price, in each case, they were willing to pay all at once, pay in installment, or they wouldn’t buy at all.

The results confirmed our hypothesis that shopping mindsets do affect people’s decisions to pay in installment. In particular, we found that — controlling for price, disposable income, and financial literacy — people are more willing to pay in installments when shopping in the necessity mindset for long durability products, and when making investments. When purchasing leisure or necessity-low durability products, their willingness to pay in installment is sharply reduced.

For example, given an expense of 1,000 USD:

  • For a necessity-long durability expense (eg. medical expenses), 50% of the respondents would pay in installment
  • For a necessity-short durability expense (eg. groceries), the figure is around 30%
  • For a leisure-short durability expense (eg. shoes), the figure is around 20%
  • And for an investment expense (eg. an online course), 45% of the respondents would choose installment.

This confirms previous findings from behavioral science that indeed, not all dollars are created equal: what you spend it for affects how you are willing to pay.


We thus have a working model that, taking shopping mindset and product duration as input, can predict overall likelihood of a population to use installments. To predict an individual consumer’s desire we further need to add two variables: disposable income and financial literacy.

How can our theory of mental accounting inform decision-making?

In our case, we used the theory to help us recommend target groups to our client. Specifically, we recommended our client to focus on those verticals in which the consumer will be more likely to be in an investment mindset, or in a necessity mindset for long durability products.

The model could have further applications to be explored across various disciplines:

  1. A marketing specialist may use the model to gauge the likelihood of a person to use certain shopping channels based on the product in question
  2. Customer service requirements are likely to differ as well depending on the mindset and related emotional state of the shopper
  3. A product may also differ in different mindsets, both for what concerns user experience and messaging.

We have seen how purchases and payments are highly emotional decisions. This is why, in designing a growth strategy, it’s essential to go beyond the usual suspects like market sizing and segmentation and delve deep into the complex psychology of the consumer, which can only be achieved by talking to real people.