A concept first named by Richard Thaler, mental accounting attempts to describe
the process whereby people code, categorize and evaluate economic
outcomes. People may have multiple mental accounts for the same kind of
resource. A person may use different monthly budgets for grocery shopping and
eating out at restaurants, for example, and constraint one kind of purchase when
its budget has run out while not constraining the other kind of purchase,
even though both expenditures draw on the same fungible resource. Similarly,
supermarket shoppers spend less money at the market when paying with cash than
with their debit cards, even though both cash and debit cards draw on the same
economic resource. One detailed application of mental
accounting, the behavioral life cycle hypothesis, posits that people mentally
frame assets as belonging to either current income, current wealth or future
income and this has implications for their behavior as the accounts are
largely non-fungible and marginal propensity to consume out of each
account is different. Mental accounting, utility, value and
transaction In mental accounting theory, framing
means that the way a person subjectively frames a transaction in their mind will
determine the utility they receive or expect. This concept is similarly used
in prospect theory, and many mental accounting theorists adopt that theory
as the value function in their analysis. Another very important concept used to
understand mental accounting is that of modified utility function. There are two
values attached to any transaction - acquisition value and transaction value.
Acquisition value is the money that one is ready to part with for physically
acquiring some good. Transaction value is the value one attaches to having a
good deal. If the price that one is paying is equal to the mental reference
price for the good, the transaction value is zero. If the price is lower
than the reference price, the transaction utility is positive.
Mental accounting cost More generally, a mental accounting cost
or mental transaction cost, a kind of transaction cost, is the cost of making
a useful decision, especially of a consumer making a useful decision to
buy, and may set a lower bound on useful price granularity in a market.
Fallacies and biases Mental accounting is subject to many
logical fallacies and cognitive biases. = Mental accounting and consumption=
People are influenced in their consumption decisions by the mental
account that comes to mind when deciding whether to consume their resources.
Spending a fixed amount of a resource, such as 5 minutes of one's time or $5 of
one's money is more psychological painful when that expenditure is drawn
from a smaller rather than a larger mental account. People consider
expenditures of money like a cup of coffee or slice of pizza, for example,
to be more painful when paying with them from the cash in their wallet than when
paying for them out of their checking account. This influences their
propensity to purchase goods and services. In a study by Morewedge,
Holtzman, and Epley, shoppers buying lunch at a local market primed to think
of the money in their bank accounts and investments spend 36% more than did
shoppers primed to think of the cash in their wallet.
= Mental accounting of credit cards and cash payments=
Another example of mental accounting is the greater willingness to pay for goods
when using credit cards than cash, and buy more goods when paying with a debit
or credit card than with cash. If people use credit card to pay for tickets to a
sporting event, they will tend to be willing to pay more than if they make
their bid with cash. This phenomenon is also related to transaction decoupling,
the separation of when a good is acquired and when it is actually paid
for. See also
Decision making Behavioral economics
Framing effect Micropayment
Preference Psychological pricing
Transaction cost References
^ a b Heath, Chip; Soll, Jack B.. "Mental Budgeting and Consumer
Decisions". Journal of Consumer Research 23: 40–52.
^ Cheema, Amar; Soman, Dilip. "Malleable Mental Accounting: The Effect of
Flexibility on the Justification of Attractive Spending and Consumption
Decisions". Journal of Consumer Psychology 16: 33–44.
doi:10.1207/s15327663jcp1601_6. ^ a b c Morewedge, Carey K.; Holtzman,
Leif; Epley, Nicholas. "Unfixed Resources: Perceived Costs, Consumption,
and the Accessible Account Effect". Journal of Consumer Research 34:
459–467. doi:10.1086/518540. ISSN 0093-5301.
^ Prelec, Drazen; Simester, Duncan. "Always Leave Home Without It: A Further
Investigation of the Credit-Card Effect on Willingness to Pay". Marketing
Letters 12: 5–12. doi:10.1023/A:1008196717017. ISSN
0923-0645.