Mental Accounting And Consumer Choice
informs
Vol. 27, No. 1, January–February 2008, pp. 15–25 issn 0732-2399 eissn 1526-548X 08 2701 0015
®
doi 10.1287/mksc.1070.0330
© 2008 INFORMS
Mental Accounting and Consumer Choice
Richard H. Thaler
Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853, thaler@chicagogsb.edu
A
new model of consumer behavior is developed using a hybrid of cognitive psychology and microeconomics.
The development of the model starts with the mental coding of combinations of gains and losses using the prospect theory value function. Then the evaluation of purchases is modeled using the new concept of
“transaction utility.” The household budgeting process is also incorporated to complete the characterization of mental accounting. Several implications to marketing, particularly in the area of pricing, are developed.
This article was originally published in Marketing Science, Volume 4, Issue 3, pages 199–214, in 1985.
Key words: mental accounting; consumer choice; pricing
History: This paper was received June 1983 and was with the author for 2 revisions.
1.
Introduction
accounting system induces an individual to violate a simple economic principle. Example 1 violates the principle of fungibility. Money is not supposed to have labels attached to it. Yet the couples behaved the way they did because the $300 was put into both
“windfall gain” and “food” accounts. The extravagant dinner would not have occurred had each couple received a yearly salary increase of $150, even though that would have been worth more in present value terms. Example 2 illustrates that accounts may be both topically and temporally specific. A player’s behavior in a poker game is altered by his current position in that evening’s game, but not by either his lifetime winnings or losings nor by some event allocated to a different account altogether such as a paper gain in the stock market. In example 3 the violation of fungibility (at obvious economic costs) is caused by the
Vol. 27, No. 1, January–February 2008, pp. 15–25 issn 0732-2399 eissn 1526-548X 08 2701 0015
®
doi 10.1287/mksc.1070.0330
© 2008 INFORMS
Mental Accounting and Consumer Choice
Richard H. Thaler
Johnson Graduate School of Management, Cornell University, Ithaca, New York 14853, thaler@chicagogsb.edu
A
new model of consumer behavior is developed using a hybrid of cognitive psychology and microeconomics.
The development of the model starts with the mental coding of combinations of gains and losses using the prospect theory value function. Then the evaluation of purchases is modeled using the new concept of
“transaction utility.” The household budgeting process is also incorporated to complete the characterization of mental accounting. Several implications to marketing, particularly in the area of pricing, are developed.
This article was originally published in Marketing Science, Volume 4, Issue 3, pages 199–214, in 1985.
Key words: mental accounting; consumer choice; pricing
History: This paper was received June 1983 and was with the author for 2 revisions.
1.
Introduction
accounting system induces an individual to violate a simple economic principle. Example 1 violates the principle of fungibility. Money is not supposed to have labels attached to it. Yet the couples behaved the way they did because the $300 was put into both
“windfall gain” and “food” accounts. The extravagant dinner would not have occurred had each couple received a yearly salary increase of $150, even though that would have been worth more in present value terms. Example 2 illustrates that accounts may be both topically and temporally specific. A player’s behavior in a poker game is altered by his current position in that evening’s game, but not by either his lifetime winnings or losings nor by some event allocated to a different account altogether such as a paper gain in the stock market. In example 3 the violation of fungibility (at obvious economic costs) is caused by the
References: Arkes, H. R., C. Blumer. 1985. The psychology of sunk cost. Organ. Becker, G. S. 1965. A theory of the allocation of time. Econom. J. Gregory, R. 1982. Valuing non-market goods: An analysis of alternative approaches. Unpublished dissertation, University of British Columbia, Vancouver, B.C., Canada. Kahneman, D., A. Tversky. 1979. Prospect theory: An analysis of decision under risk Knetch, J. L., J. A. Sinden. 1984. Willingness to pay and compensation demanded: Experimental evidence of an unexpected disparity in measures of value. Quart. J. Econom. 99 507–521. Lancaster, K. J. 1971. Consumer Demand, A New Approach. Columbia University Press, New York. Thaler, R. 1980. Toward a positive theory of consumer choice. Thaler, R., E. J. Johnson. 1990. Gambling with the house money and trying to break even: The effects of prior outcomes or Thaler, R., H. M. Shefrin. 1981. An economic theory of self-control. Tversky, A., D. Kahneman. 1981. The framing of decisions and the rationality of choice