Summary: Consumer Behavior
Mental accounting can be said to be a set of cognitive operations that households and individuals use to organize, evaluate and keep track of their financial activities. This paper gives a summary about our current understanding about the nature of people’s engagement in mental accounting techniques. This paper concentrates on the three components of mental accounting. The first one is concerned with how people perceive and experience outcomes, and how decisions are made and then evaluated. For example, a consumer choice can be understood by incorporating value of the deal. The second component of mental accounting involves assigning activities to certain specific accounts. The last component concerns the numbers of times in which accounts are evaluated, this process has been labeled ‘choice bracketing.’ Evaluation of accounts can be done weekly, monthly, and yearly.
The main reason for studying mental accounting is to improve our understanding of the psychology of how people choose. Being able to understand mental accounting helps us to understand how people make choices since mental accounting rules are not neutral. Perceived attractiveness of choices can be affected by accounting choices such as which category to ascribe a purchase or whether to combine an outcome with others in that category. Money in different mental accounts cannot be interchanged. Mental accounting matters because of violations of fungibility. Existence of budgets that are not fungible can influence consumption in several ways. This can happen in a case where one budget is spent up to its limit while there are other accounts that have unspent funds remaining. The purpose of this research article is to show how accounting matters.
The importance of mental accounting to us has not received much attention. Do we know the normative status of mental accounting? There is no purpose of worrying about whether mental accounting is rational or not. Mental accounting procedures have changed to economize thinking costs and time and also to deal with problems of self control. This explains the reason people pay more attention to sunk costs, buy unnecessary things because the deal is too good to miss, quit early on a good day and put their retirement money in a money market account. Anyone who is interested in improving personal decision making should do more on mental accounting as a prescriptive device. They should find ways of modifying mental accounting rules to achieve certain goals.
In their paper, Kahneman and Tversky note that when the normal bettor is losing money on the day, there is a rise in long-shot bets on the day’s last race. This is because the average bettor is anxious to recover his money -the analysis applies to gambling decisions. It has been observed that when gambles are bracketed together, the result of a single gamble can influence the choices made later.
These findings are useful to marketers who wish to increase their sales through promotions that offer discounts. Low prices will increase sales as people will be enticed to buy the goods thinking that the deal is too good. Marketers can also use mental accounting understanding to attract investors in the stock market since people consider dividends as some form of allowance whereas the principal amount remains intact. Consumers can also use understanding from mental accounting to develop good spending habits and reduce instances of impulse buying. Mental accounting also allows the consumer to resist the influence of discounts and burgains.