Chapter 8: Mental accounting and economic behavior Flashcards
What is mental accounting
Mental account is a concept that describes mental representations and cognitive processes related in particular to transactions involving money
Based on what 3 variables do people construct simplified mental representations
(1) Current income
(2) Current assets
(3) Future income
What mental account is associated with the highest marginal propensity to consume?; e.g. what is the best predictor of consumption?
Current income
What mental account is least associated with marginal propensity to consume? e.g. what is lowest predictor of consumption?
Future income
What are implications of broad mental accounts?
Variance in budget constraints. How people consume depends on the categorization they make with their recourses in one of the mental accounts
What is a minimal mental account
An absolute saving relate to the zero-reference point
What is a topical mental account
A saving compared to the original price
What is a comprehensive mental account?
A saving from the wider context of the whole shopping trip
What is an example of income framing and how does it apply to spending from sold stocks?
Income framed as bonus feels like extra money to spend
Spending from sold stocks is more likely for a gain than a loss
Why is the medium of payment important? (2)
- denomination effect –> people spend less if there is one big bill compared to 3 small bills
- Plastic effect –> people spend more on the same item when they buy it by card compared to bank notes
Why is setting a budget helpful?(2)
(1) Facilitating keeping control
(2) An anchor against which expenses are tracked
What is hedonic editing and how does this effect positive events?
we prefer positive events more if outcomes are mentally separated (for example several 1 day holiday compared to one large holiday
What is hedonic editing and how does it affect negative events?
We perifere negative events with mentally integrated outcomes compared to smaller bills
What is hedonic editing and the silver lining effect?
Small gains are preferred when segregated from large losses
What are determinants of mental accounting? (2)
(1) Impatient people wit los self control apply less self-control
(2) Availability of money may increase or decrease the need for mental accounting
What is positively associated with mental accounting? (4)
(1) Long-term time orientation
(2) Having debts
(3) Having saving goals
(4) Having knowledge of financial products and investments
What is negatively associated with mental accounting? (5)
(1) Household income
(2) Home equity
(3) Savings
(4) higher education
(5) being male
