Mental Accounting, Similarity, and Preferences Over the Timing of Outcomes

Abstract

The theory of mental accounting is often used to understand how people evaluate multiple outcomes or events. However, a model of which outcomes are associated with the same mental account and evaluated jointly, versus different accounts and evaluated separately, has remained elusive. We develop a framework of mental accounting based on similarity theory: outcomes that overlap on salient attributes are categorized and assigned to the same mental while outcomes that do not overlap attributes are assigned to different accounts. This allows us to derive behavioral hypotheses on people’s preferences over the timing of outcomes given similarity-based constraints on mental accounting operations. Four studies provide support for the predictions: People prefer to experience similar losses close together in time and spread dissimilar losses apart; the reverse is true for gains, with a preference for dissimilar gains close together in time and similar gains to be spread apart. Importantly, our model is able to rationalize prior evidence that has found only limited support for the predictions of mental accounting on preferences over the timing of outcomes. Once the psychological process of similarity and categorization is explicitly incorporated into a formal model of mental accounting, its predictions are fully supported by the data.

Keywords: Mental Accounting, Hedonic Editing, Similarity, Categorization, Prospect theory, Intertemporal preferences

JEL Classification: D99