Mental Accounting

The Summary of the Papers:

“Mental Accounting and Consumer Choice”

&

“Advances in Research on Mental Accounting and Reason-Based Choice”

Both the companies and the individual households have some explicit and implicit mental accounting systems which influence their decisions in unexpected ways and shape their consumer preferences. The paper “Mental Accounting and Consumer Choice” by Richard Taler explains some aspects of the implicit mental accounting system used by individuals and households and develop a richer theory of consumer behavior than standard economic theory. The other paper “Advances in Research on Mental Accounting and Reason-Based Choice” by Ran Kivetz tells about the recent research on the role of this mental accounting and reaon based choice in the construction of consumer preferences. It suggests that the principles of mental accounting often regulate the purchase and consumption of the luxury goods and it specifically focuses on reasons which may play an important role in the buying decision.

Mental accounting is a process whereby people treat different resources differently depending on how they are labelled and grouped. There are three interrelated components. The first component explains how outcomes are framed and experienced. For example, if money is won in the lottery, it will be perceived as unexpected, less serious and costless compared to a money earned through hard work. The second component of the mental accounting involves the assignment of activities to mental accounts. The consumers label the resources and consumption, and then group them into accounts like regular income (salary), necessary consumption (electricity bills) or luxury consumption (cruise holiday). The third component concerns about how frequently the mental accounts are evaluated (monthly, weekly, etc) and whether they are defined narrowly or broadly. The paper suggests that, consumers are psychologically tend to match certain mental accounts with...