MENTAL DEPRECIATION AND MARGINAL DECISION-MAKING

We propose that individuals practice ''mental depreciation,'' that is, they implicitly spread the fixed costs of their expenses over time or use. Two studies explore how people spread fixed costs on durable goo ds. A third study shows that depreciation can lead to two distinct err ors in marginal decisions: First, people sometimes invest too much eff ort to get their money's worth from an expense (e.g., they may use a p roduct a lot to spread the fixed expense across more uses). Second, pe ople sometimes invest too little effort to get their money's worth: Wh en people add a portion of the fixed cost to the current costs, their perceived marginal (i.e., incremental) costs exceed their true margina l costs. In response, they may stop investing because their perceived costs surpass the marginal benefits they are receiving. The latter eff ect is supported by two held studies that explore real board plan deci sions by university students. (C) 1996 Academic Press, Inc.