Consumers' Mental Accounting

5 Pages Posted: 7 Jan 2019

See all articles by Manel Baucells

Manel Baucells

University of Virginia - Darden School of Business

Abstract

When a consumer purchases an item, the presumption is that the benefit obtained from it exceeds the price paid—we can think of this difference as the consumer profit. How do consumers calculate this profit, especially when they do not immediately consume the purchased item? This technical note presents a model of mental accounting that gives insights into the process that consumers follow to calculate value. It compares rational logic, accounting logic, and mental accounting logic, incorporating the phenomena of loss aversion, transaction utility, and consumer anomalies. This note is used at Darden in the second-year “Behavioral Decision Making” course. It would also be suitable in courses covering rational decision making in business.

Excerpt

UVA-QA-0908

Dec. 17, 2018

Consumers' Mental Accounting

When a consumer purchases an item, say an airline flight, the presumption is that the benefit obtained from the trip—visualized in dollars—exceeds the price paid. We can think of the difference between the consumption benefit and the price as the consumer profit, sometimes called consumer surplus. It is safe to assume that consumers try to maximize their profit by seeking items with the most benefit (e.g., the shortest flight path at the most convenient time) for the least possible cost.

Often, products are not consumed at the time of purchase. Examples include a flight bought today and used a month later; a durable good, such as a car, bought at a point in time with the benefit of usage spread over time; or a gym subscription paid up front with the benefit spread over each workout.

For the situations just described, how do consumers exactly calculate the profit? One possible answer is simply to sum the benefits and subtract the costs. That is, consumers count a loss every time they pay for an item and count a gain every time they use or consume a product. If consumers used benefits minus costs to guide their decisions, however, we would not observe apparent anomalies in consumer behavior, such as the sunk cost effect, the flat rate bias, or reference price effects. In this note, we will present a model of mental accounting that gives insights into the process that consumers follow to calculate value.

. . .

Keywords: mental accounting, consumer profit, consumer surplus, reference price, loss aversion, transaction utility, payment depreciation, feeling of free consumption, flat-rate bias, hoarding, psychology, consumer behavior

Suggested Citation

Baucells, Manel, Consumers' Mental Accounting. Darden Case No. UVA-QA-0908. Available at SSRN: https://ssrn.com/abstract=3310482

Manel Baucells (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

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