| Summary: | Previous research
in multiple judgment domains has found that nonlinear functions are typically
processed less accurately than linear ones. This empirical regularity has
potential implications for consumer choice, given that nonlinear functions
(e.g., diminishing returns) are commonplace. In two experimental studies we
measured precision and bias in consumers' ability to identify surpluses when
returns to product attributes were nonlinear. We hypothesized that nonlinear
functions would reduce precision and induce bias toward linearization of
nonlinear relationships. Neither hypothesis was supported for monotonic
nonlinearities. However, precision was greatly reduced for products with
nonmonotonic attributes. Moreover, assessments of surplus were systematically
and strongly biased, regardless of the shape of returns and despite feedback
and incentives. The findings imply that consumers use a flexible but coarse
mechanism to compare attributes against prices, with implications for the
prevalence of costly mistakes.
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