Correlation Between Anomalies and Theories of Mental Accounting
34 Pages Posted: 14 Jan 2015 Last revised: 14 Apr 2020
Date Written: January 13, 2015
Several consumer choice models account for anomalies in consumption-payment decisions. We consider four models, namely, Prelec and Loewenstein 1998 double-entry model, Thaler 1985 double-comparison model, Baucells and Hwang 2014 reference price adaptation model, and Köszegi and Rabin 2006 reference dependent model. We observe that these models make distinct predictions regarding how different anomalies ought to be related or unrelated. In a controlled experiment we elicit the participant's tendency towards five anomalies, namely, the sunk-cost effect, the reluctance to trade, the flat-rate bias, the preference for pre-pay, and the preference to be post-paid. The observed correlation between anomalies across individuals is consistent with the prediction of Baucells and Hwang 2014 and, to a large extent, with that of Prelec and Loewenstein 1998. The evidence is partially consistent with Thaler 1985, and we find little support for Köszegi and Rabin 2006. The results suggest that the speed of adaptation of reference prices to current price information is a key explanatory factor.
Keywords: mental accounting, reference price adaptation, sunk-cost fallacy, reluctance to trade, flat-rate bias
JEL Classification: D01, M03
Suggested Citation: Suggested Citation