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The nature of mental accounting
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DescriptionThe nature of mental accounting
The natural and components of mental accounting:
The term “mental accounting” was introduced by Thaler’s landmark article “Mental accounting and consumer choice” (1985). Mental accounting is the set of cognitive operations used by individuals and households to code categorize and evaluate financial activities. Mental accounting encompasses a board range of human behavior and was developed to explain a number of behavioral anomalies. It helps us to develop a better understanding of psychological processes that underlies choices and decisions. There are 3 parts to the metal accounting process: first is the perception of outcomes and the making, evaluation of decisions, second is the assignment of activities to specific accounts and third is the determination of the time periods to which different mental accounts relate.
Budgeting for spending
Individuals use budgets to control spending and also relate to other monetary categories such as income and wealth. Studies also suggest that people appear to maintain different account for time. The characteristic of fungibility relates to the substitutability of different budget categories, if budget are fungible, overspending in one category can be compensated by underspending in another category and vice versa.
Thaler (1999) suggests that the allocation of the spending to different categories serves two purposes. The first is to facilitate comparisons or trade-offs between different uses of funds. The second purpose is to act as a self-control device. Evidence suggests that different individual and households conduct this budgeting of spending in quite different ways. In general, pooer individuals or families tend to have budgets defined over shorter periods, like months or weeks, whereas wealthier individuals and families may have annual budgeting periods.
The fungibility of spending categories has also been investigated by observing the reactions of consumers to unexpected price changes and in-store coupons. Meyer and Morales (2002) find that the unanticipated price increases reduce customers’ tendencies to buy discretionary goods while unanticipated price reductions increase it. Unexpected coupons also appear to have effect of increasing the number of unplanned purchase.
It is suggested that people are often delighted to receive gifts that they would never buy for themselves. There are various explanations regarding why people enjoy receiving gifts. Firstly, the marginal cost of a gift to the recipient is zero. Secondly there is a marginal utility associated with gratitude, the receiver of the gift may be gratified that the giver has such a good opinion of them that they choose to buy them a gift. Thirdly, the recipient ...
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