On the Role of Similarity in Mental Accounting and Hedonic Editing

47 Pages Posted: 23 Sep 2019 Last revised: 2 Aug 2021

See all articles by Ellen Evers

Ellen Evers

UC Berkeley, Haas

Alex Imas

University of Chicago - Booth School of Business

Christy Kang

University of Chicago - Booth School of Business

Date Written: May 1, 2021

Abstract

The theory of mental accounting is often used to understand how people evaluate multiple outcomes or events. However, a model predicting 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 that incorporates an online, bottom-up process of similarity and categorization into mental accounting operations. In this categorization-based model of mental accounting, outcomes that overlap on salient attributes are automatically categorized and assigned to the same mental account while outcomes that do not overlap on salient attributes are assigned to different accounts. We use this model to derive the hedonic accounting hypothesis, which generates testable behavioral predictions on people’s preferences over the timing of outcomes given similarity-based constraints on mental accounting operations. Six 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 spread apart across time. Importantly, our model is able to rationalize prior evidence that has found only limited support for the predictions of mental accounting and hedonic editing. Once the psychological process of similarity and categorization is explicitly incorporated into a formal model of mental accounting, its predictions are supported by the data.

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

JEL Classification: D99

Suggested Citation

Evers, Ellen and Imas, Alex and Kang, Christy, On the Role of Similarity in Mental Accounting and Hedonic Editing (May 1, 2021). Available at SSRN: https://ssrn.com/abstract=3452943 or http://dx.doi.org/10.2139/ssrn.3452943

Ellen Evers

UC Berkeley, Haas ( email )

Haas School of Business
Berkeley, CA 94720
United States

Alex Imas (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Christy Kang

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

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