Week 9 Mental Accounting Flashcards
What is mental accounting?
A set of cognitive operations that code and categorise and evaluates financial decisions
There are two utilities with mental accounting, transaction and accquisition. Explain
Transaction utility is the value you place on a good minus the price paid
Accquisition utility is the refernece point price placed on a good minus the actual price paid
In mental accounting, there are four principles. Explain them all. These are principles resulting in when we gain or lose.
Segregate gains Value (x) + Value (y) > Value ( x + y )
We want to integrade losses so ValueX + Value Y < ValueXY
If loss is much bigger than gain we want to segregate small gain from big loss
If gain is much bigger than loss we want to integrate small loss
Explain fungibility and how Mental accounting seems to violate the neoclassical assumption that money is fungible
Fungibility is the ability of a good or asset to be interchanged for another of likekind.
In mental accounting it seems that even if people are willing to spend 10 pounds they would not have the same willingness to do this for every thing as it may exceed a mental budget they have placed.
Mental accounting: Explain the serious-frivolous scale and explain why people want dividends even if the tax on this is higher than repurchasing shares
Individuals place income/spending in to broad categories, for example a generous tip as a waiter may be seen as frivolous and would be spent on cinema and other fun stuff. Alternatively, an increase in salary, the extra gained may be put forward into savings or other serious budgets.
Dividends act like a self control, essentially allowing people to spend the dividend and keep the principal. Whereas if shares were repurchased, they would need to dip into the principal and this can create issues.
Explain payment decoupling and give example with credit card
Payment decoupling is when spending and consumption can not be matched, even when they happen simaltaneously. or example with credit card spending you can accuquire the good and not have to actual pay (reduction in utility) until later and you can thus mental budget it into an overall bills account.
Myopic Loss Aversion, explain.
People may check their portolio too much and begin to become more loss averse, such that they miss out on potential gains as a result.
Mental Accounting. Diminisihing marginal sensitivty is important in this topic. Explain how this relates to gains and losses
People are more likely to take a 5 dollar discount on an item worth 15 dollars than a 5 dollar discount on an item worth 5000 dollars due to DMS.
What is emotional accounting
This is allocating funds based on how you feel as a result of its obtainment. If money gained as a result of a dead baby you are less likely to spend it on fun things as this would create disutility as you gain guilt and may instead spend it on charity etc.
Explain why people may drive for 20 minutes to save $5 on a $15 calculator but not for a $125 dollar jacket. What principle of PT is relevant here?
Diminishing marginal sensitivity plays a role here. The way this is editied is as follows V(-125)-V(-120) > V(-15)-V(-10) , the jacket is bigger so the calculator is preffered as a result of DMS.
Why are people more reluctant to replace a $20 theater ticket if they have lost it than if they have lost $20 cash? What principle of the standard model does this violate?
Violates fungibility, if all money was equal then it would not matter.
