Lecture 6: mental accounting and reason based choice Flashcards
opportunity costs
time and money should be taken into consideration when doing things. When you pay 100 euro’s for something you could have done a lot of other things with it.
prospect theory
not limited to money, also time for example
Between jobs choice
if a manager offers you 1000 euro’s to work an hour how much do you expect him to pay you to work 2 hours. and why is this 2000 and not 1013 if your normal wage is 13 euro.
you shouldn’t compare it to the extreme offer, but to what you usually make.
windful money
money you don’t expect to get.
different ways you get money can influence how you spend it
mental accounting
we treat money differently dependent on how we get it. we sometimes hold sentimental value towards it, but we should just see it as a way to get something else.
fungibility of money
any unit of money is substitutable for another.
a central assumption in the theory of consumer choice.
topic thinking
we don’t mix money from certain topics.
to protect ourselves from losing the money.
mental budgetting
having different accounts in our mind we keep seperate for different things. this is flexibal, but consequential
three types of mental accounts within mental budgeting
- minimal account
- topical account
- comprehensive account
minimal account
every decision you make is based on the elements of the decision
topical account
you use the elements of the decision, but also the context. this is what we typically use
comprehensive account
you take everything you have and make every decision related to what you have. This is how economic theory thinks about decision making
hedonic editing
we do what makes us most happy. (we are a pleasure machine)
mental accounting with two positive outcomes
seperate. first gaining 10 and then 5 doesn’t matter, but seperating the outcomes gives more marginal utility.
mental accounting with two negative outcomes
integrating. first losing 10 euro’s and then 5 or just losing 15 doesn’t matter, but according to marginal utility integrating would be better.
mental accounting with mixed outcomes
- mixed gain: integrate (winning the lottery and losing 80% is worse than just winning 20%)
- mixed losses depends
- if the losses are much larger than the gains segregating is a silver lining, if you have a small gain you segregate so you have a little thing that makes you happy
- if the losses are only a bit larger you integrate so it cancels out a little
acquisition utility
value of a good relative to its price
transaction utility
percieved value of the deal, is the price fair in relation to the reference price
payment coupling
normally you buy something and consume it, so the two things are coupled, but sometimes that is not the case.
Gourville & Soman
ski experiment where people could either pay 4X40 (coupled consumption) times a ski pass for four days or just 160 (decoupled consumption) euro’s all at once.
then on the 4th day there was a heavy snowstorm and the people that bought a 160 pass didn’t go, but the 4X40 felt like they payed for an extra day.
by decoupling costs from consumption the sunk cost fallacy can be overcome
why do we use mental accounting if it isn’t rationally/economically beneficial?
self control. saving is difficult, but overspending is easy. deciding not to touch our savings even if that means we are in debt keeps us from spending our savings.
in a way this is rational behavior, because it helps us in the long run.
Reason-based choice models
models based on how we usually talk about decisions. help us understand conflict and allows for comparative considerations. gives a more applicable model in contradiction to the value based models.
choice between equally attractive options
people resolve the conflict by selecting the alternative that is more superior on the more important dimension, which seems to provide a compelling reason for choice.
reasons pro and con, rejecting versus choosing
if positive features are weighed heavier when choosing than rejecting ans negative features are weighed heavier when rejecting than choosing, an enriched option could be both chosen and rejected when compared to an impoverished option.
principle of procedure invariance
rational choice requires strategically equivalent methods of elicitation to yield identical preferences.
the choose-reject discrepancy
the way things are presented influence our choices. represents failure of procedure invariance
Choice under conflict
- seeking options: the need to choose creates conflict and we can resolve it by seeking additional options
- adding options: the supermarket adds options of balsamic vinegar.
assymetric dominance
adding options
by giving another option an earlier option becomes more attractive because it is now better than one and equal to another options instead of equal to one.
compromise effect
adding options
average option is better on aspects that other options performe poorly on. (and worse on aspects they excel in)
disjunction effect
you get a reason to select one over another if you didn’t already know what to choose. sometimes we have reasons, but don’t know them yet if a third option is added.
Shefir and Tversky on the disjunction effect
people would go on holiday with their friends if they passed their exams and if they didn’t, but wouldn’t go if the were not sure.
this is a violation of the sure-thing principle.
discount ambigous information
combination of the disjunction effect and transaction decoupling.
ambiguity makes people rational, because they are irrational.
studied with scenario’s about sunk costs.
evaluability hypothesis
in reason-based choice experiments we usually give people choices, but in real life there is usually an option that people evaluate individually.
studied with giving people an individual choice, and then two options. (dictionary study)
