An extended warranty is a commonly purchased financial product that involves the promise to reimburse the buyer of a durable good for repairs during the period of coverage. Although such product repairs are infrequently needed, nine studies (including three in the Web Appendix; six preregistered; N = 3,304) show that many consumers who choose to buy extended warranties expect that purchasing the warranty will ultimately prove to be a financially savvy decision (i.e., will provide a positive return on investment). Further, this tendency is more pronounced among consumers with greater affinity for gambling. The authors argue that this “illusion of victory” is a major factor in extended-warranty purchases, with important implications for consumer welfare. Given that extended warranties are disproportionately purchased by low-income consumers, societal benefits may be realized if financial products that protect consumers from small losses (vs. large, catastrophic losses) are clearly distinguished and governed by separate regulations.
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