Why We Buy Extended Warranties
What field surveys, an insurance experiment and a study of timing say about paying for cover on a product, and why feeling covered is part of the price.
Answer to the question
Why do people buy extended warranties?
Because the expected emotional benefit of being covered outweighs the repair odds. In two field surveys, consumers overestimated breakdowns, yet that did not fully explain purchases, and the feeling of holding cover was the strongest predictor of buying. Another set of studies found people more likely to buy cover when it is offered before they commit to the product.
Key takeaways
- Marieke Huysentruyt and Daniel Read found in two field surveys that consumers overestimated how likely products were to break and how much repairs cost, yet this did not fully explain why they bought extended warranties.
- In the same surveys, the expected emotional benefit of holding a warranty was the strongest predictor of buying and of willingness to pay.
- Christopher Hsee and Howard Kunreuther found in 2000 that attachment to an item raised willingness to insure it even when the payout stayed the same.
- Dongeun Kim and Dhananjay Nayakankuppam found in four studies that consumers were more inclined to buy extended warranties before committing to a product than after.
- Stanley McChrystal and Anna Butrico's Risk shows how ten steps at 90 per cent each leave about 35 per cent, a reminder of how small risks combine.
Ten steps that each have a 90 per cent chance of working leave about a 35 per cent chance that all ten work. Stanley McChrystal and Anna Butrico use that sum in Risk to show how small risks combine, and it frames why people buy extended warranties: a shopper rarely has the numbers, so the feeling of being covered does much of the deciding. A warranty is a small insurance contract, and the research asks what a buyer is thinking about when the offer arrives. Surveys from 2010, an insurance experiment from 2000 and a four-study paper on timing from 2023 all point the same way.
Why do people buy extended warranties?
Extended warranties are optional contracts sold with a product, promising repair or replacement for a set period beyond the standard cover. The buyer pays a known sum now against an unknown cost later, which makes them a small-scale version of insurance and a tidy test of how people weigh rare events.
Risk gives a clean way to think about the number of things that can go wrong. In its chapter on a 1980 rescue operation, the authors reconstruct the odds quoted at the time and show that ten steps at 90 per cent each multiply to roughly 35 per cent. They concede that the inputs were arbitrary. The arithmetic cuts both ways. Many small chances do combine into a larger one, so the worry is reasonable in kind, but the size of the combined figure depends wholly on the numbers fed in, and a shopper rarely has them for a given item.
What fills the gap shows up in two field surveys on why people pay for extended warranties, published in 2010 by Marieke Huysentruyt and Daniel Read. Consumers in their data greatly overestimated how likely a product was to break and how much a repair would cost. Those overestimates did not fully account for purchases, though. What people paid for tracked how bad it would be to go without cover, not how likely the breakdown was, a pattern that fits probability neglect. In that data the odds nearly drop out of the choice, an extreme case of the weighting described in Why a 1 Per Cent Chance Feels Bigger.
The strongest single predictor of both buying and willingness to pay was the expected emotional benefit of holding a warranty. People with higher cognitive skills overestimated the economic factors less, yet emotion still weighed heavily in their choices. Across the studies in this article, the price of extended warranties seems to cover three separate things, and a buyer may be paying for any mix of them:
- Protection against a repair bill, the part a cost estimate can see.
- Relief from the worry that the product will fail, the emotional benefit the surveys measured.
- Comfort if a valued item is damaged, the idea behind the next section.
What else shapes the price of cover?
Attachment changes what extended warranties and other cover are worth. In a 2000 paper, Christopher Hsee and Howard Kunreuther found that attachment to an item raised willingness to insure it even when the payout stayed the same, and made people more likely to bother filing a claim for a fixed payout after the item was damaged. Standard decision theories predict neither. The authors explain both with a consolation hypothesis: compensation works as comfort for losing something cared about, not only as money.
Cover on a loved item, including extended warranties, buys comfort as much as protection, and anticipated regret may belong in that comfort, since the buyer pictures the breakdown and then pictures having said no. What the papers share is a buyer for whom the feeling of being covered is part of the product. It also fits the pull of losses described in Loss Aversion and the Bet You Turn Down, since a damaged favourite is a loss the buyer can picture in detail.
Does the timing of the offer change the answer?
Order matters.
Dongeun Kim and Dhananjay Nayakankuppam found in four studies, reported in 2023, that shoppers offered an extended warranty before they buy are more likely to take one than shoppers offered the same cover afterwards. Before committing to a product, consumers more readily think about possible failures, which makes cover seem worthwhile. After committing, they tend to focus on the product's positive features, and the motive to buy cover weakens. A seller who knows this can place the offer where it is most likely to be considered, and a buyer who knows it can notice which frame the offer arrived in.
The finding sits comfortably beside the surveys. If the expected emotional benefit drives buying, then anything that brings the breakdown to mind raises that benefit, and a pre-purchase offer does exactly that. The same logic explains why small chances of loss draw people to insure, a pattern set out in What is the fourfold pattern of risk. The contracts are offered at the point where the failure is easiest to imagine and the product's charms are least settled. The studies used scenarios and behavioural measures, and the authors suggest that presenting the offer before the purchase decision may raise sales.
Common questions
Why do people buy extended warranties?
Surveys by Huysentruyt and Read found that consumers overestimate how likely products are to break and how much repairs cost, yet those overestimates did not fully explain purchases. The expected emotional benefit of holding a warranty was the strongest predictor of buying.
Does the timing of the offer change whether people buy?
Yes, in four studies by Kim and Nayakankuppam. Consumers were more inclined to buy cover before committing to the product than after, because before committing they think more about failures.
Does attachment to an item raise willingness to insure it?
In Hsee and Kunreuther's 2000 paper it did, even when the payout was the same.
Does this say whether a warranty is worth buying?
No. The research describes why people buy extended warranties. It is not financial advice and does not assess any particular warranty.
Sources
McChrystal, S. A., & Butrico, A. Risk: A User's Guide. Seed book; vault hub Books/Risk.
Huysentruyt, M., & Read, D. (2010). How do people value extended warranties? Evidence from two field surveys. Journal of Risk and Uncertainty, 40(3), 197-218. doi:10.1007/s11166-010-9094-9 https://doi.org/10.1007/s11166-010-9094-9
Hsee, C. K., & Kunreuther, H. C. (2000). The affection effect in insurance decisions. Journal of Risk and Uncertainty, 20(2), 141-159. doi:10.1023/A:1007876907268 https://doi.org/10.1023/A:1007876907268
Kim, D., & Nayakankuppam, D. (2023). When to present an extended warranty: Pre- vs. post-purchasing a product. Psychology & Marketing, 40(9), 1821-1829. doi:10.1002/mar.21857 https://doi.org/10.1002/mar.21857