Article

The Red and the Black: Mental Accounting of Savings and Debt

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Abstract

In the standard economic account of consumer behavior the cost of a purchase takes the form of a reduction in future utility when expenditures that otherwise could have been made are forgone. The reality of consumer hedonics is different. When people make purchases, they often experience an immediate pain of paying, which can undermine the pleasure derived from consumption. The ticking of the taxi meter, for example, reduces one's pleasure from the ride. We propose a “double-entry” mental accounting theory that describes the nature of these reciprocal interactions between the pleasure of consumption and the pain of paying and draws out their implications for consumer behavior and hedonics. A central assumption of the model, which we call prospective accounting, is that consumption that has already been paid for can be enjoyed as if it were free and that the pain associated with payments made prior to consumption (but not after) is buffered by thoughts of the benefits that the payments will finance. Another important concept is coupling, which refers to the degree to which consumption calls to mind thoughts of payment, and vice versa. Some financing methods, such as credit cards, tend to weaken coupling, whereas others, such as cash payment, produce tight coupling. Our model makes a variety of predictions that are at variance with economic formulations. Contrary to the standard prediction that people will finance purchases to minimize the present value of payments, our model predicts strong debt aversion—that they should prefer to prepay for consumption or to get paid for work after it is performed. Such pay-before sequences confer hedonic benefits because consumption can be enjoyed without thinking about the need to pay for it in the future. Likewise, when paying beforehand, the pain of paying is mitigated by thoughts of future consumption benefits. Contrary to the economic prediction that consumers should prefer to pay, at the margin, for what they consume, our model predicts that consumers will find it less painful to pay for, and hence will prefer, flat-rate pricing schemes such as unlimited Internet access at a fixed monthly price, even if it involves paying more for the same usage. Other predictions concern spending patterns with cash, charge, or credit cards, and preferences for the earmarking of purchases. We test these predictions in a series of surveys and in a conjoint-like analysis that pitted our double-entry mental accounting model against a standard discounting formulation and another benchmark that did not incorporate hedonic interactions between consumption and payments. Our model provides a better fit of the data for 60% of the subjects; the discounting formulation provides a better fit for only 29% of the subjects (even when allowing for positive and negative discount rates). The pain of paying, we argue, plays an important role in consumer self-regulation, but is hedonically costly. From a hedonic perspective the ideal situation is one in which payments are tightly coupled to consumption (so that paying evokes thoughts about the benefits being financed) but consumption is decoupled from payments (so that consumption does not evoke thoughts about payment). From an efficiency perspective, however, it is important for consumers to be aware of what they are paying for consumption. This creates a tension between hedonic efficiency and what we call decision efficiency. Various institutional arrangements, such as financing of public parks through taxes or usage fees, play into this tradeoff. A producer developing a pricing structure for their product or service should be aware of these two conflicting objectives, and should try to devise a structure that reconciles them.

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... The negative ramifications of AI on consumer spending through pain of payment Pain of payment (PoP) refers to the psychological pain consumers feel when parting with their money [36]. Lower PoP leads to greater purchase likelihood, spending, and willingness to pay [37]. ...
... Paying with a credit card (vs. cash) decreases PoP because it decreases the saliency of the cost [38], the salience of the loss of monetary resources [39], and delays the loss of these resources [36]. Additionally, product discounts decrease PoP as they decrease the perceived cost of the product [40]. ...
... Similarly, AI can also influence consumers' mental accounting, the process by which consumers mentally categorize and treat their resources [36,57]. Consumers' mental accounts drive their budgeting processes [57], can lead consumers to treat money as non-fungible [36], and influence their income-seeking behaviors [58]. ...
... cash) is associated with consumers spending more money (Feinberg, 1986;Hirschman, 1979;Thomas et al., 2010), buying a greater number of shopping items (Inman et al., 2009), and having a higher willingness to pay for products (Prelec & Simester, 2001). This phenomenon has been coined the "cashless effect" (Liu & Dewitte, 2021) and is typically attributed to the so-called "pain of paying" or psychological suffering that consumers experience when parting with their cash (Prelec & Loewenstein, 1998;Zellermayer, 1996). However, scholars have recently started to question whether the cashless effect has faded, disappeared, or even reversed over time (Lie et al., 2010;Liu & Dewitte, 2021;Nakajima & Izumida, 2015), with research increasingly recognizing that there may be contingency factors at play that can shift or moderate the cashless effect (Boden et al., 2020). ...
... [ Figure 2 here] Decoupling Prelec and Loewenstein (1998) distinguish between payment methods (or mechanisms) which decouple costs (i.e., payment) from benefits (i.e., consumption) and those that do not. ...
... BNPL schemes temporally separate the costs and benefits of consumption (Gourville & Soman, 1998;Soman, 2001), which can make a payment less memorable as it might only be viewed as a commitment to pay instead of an actual payment. Consequently, the delay between obtaining the benefits of consumption and the costs thereof as is the case with decoupled payment methods lowers the pain of paying, which reduces barriers to spending (Prelec & Loewenstein, 1998). This can lead decoupled payment methods to be treated as "monopoly money" (Raghubir & Srivastava, 2008), enticing consumers to spend more compared to when using more immediate (i.e., coupled) payment methods. ...
Article
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Over 40 years of research links cashless payment methods to increased consumer spending. Referred to as the “cashless effect,” this phenomenon has recently come under scrutiny as consumers are increasingly familiar with non-cash methods which could weaken the cashless effect, while other research challenges the robustness of the effect and questions which conditions could strengthen or weaken it. The current study contributes to reaching a consensus in this ongoing debate through a large-scale meta-analysis leveraging a meta-analytical framework that synthesizes the insights from the extant literature. Across 392 effect sizes from 71 papers, we reveal a small, but significant, cashless effect. Further, we show no evidence that cashless payment method features influence the cashless effect, while various consumption situations and contextual factors do. Specifically, the cashless effect is stronger in conspicuous consumption situations, while it is weaker in pro-social consumption situations. The results also reveal that the business cycle impacts the cashless effect, with it being stronger in periods of economic growth. Finally, the cashless effect has generally weakened over time. Our findings offer novel and actionable insights for academics, consumers, and practitioners such as retailers, charities, and policymakers interested in the effects of payment methods on consumer spending behavior.
... That is, consumers feel less pain when paying with a credit card, thereby increasing purchases. This difference in pain comes from payment transparency (Soman, 2003) and payment coupling (Prelec & Loewenstein, 1998). Specifically, the process of swiping a credit card renders the outflow of money invisible and omits the step of checking amounts, so credit card payment is less transparent, which leads to lower pain of money loss (Soman, 2003). ...
... "Coupling" refers to the extent to which payment is temporally related to consumption. The "buy-nowpay-now" nature of cash payment creates tight coupling, while the delayed payment of a credit card facilitates decoupling between consumption and payment, thus reducing the pain of paying when making decisions (Prelec & Loewenstein, 1998). Interestingly, when including a debit card in the comparison, no difference in spending was found between the credit and debit cards, and the two card payments both decreased the pain of paying compared to cash (Park et al., 2021;Shah et al., 2016). ...
... The third characteristic is the low pain of paying. The double-entry mental account (Prelec & Loewenstein, 1998) indicates that the consumption entry records the net utility of consumption, which is equal to the utility of acquiring goods minus the disutility of payments. Therefore, the lower the pain of mobile payment versus cash, the higher the net utility of consumption, which implies a more satisfying consumption journey. ...
Article
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The past years have witnessed a phenomenal growth of the mobile payment market, but how mobile payment affects purchase behavior receives less attention from academics. Recent studies suggested that lower pain of paying may not fully clarify the relationship between mobile payment and increased purchases (i.e., mobile payment effect). The current research first introduced price level in Study 1 and demonstrated that the pain of paying served as an underlying mechanism only in the high‐price condition rather than the low‐price condition. As such, Study 2 was conducted in a low‐price context to address the uncovered mechanisms. We propose a new concept of “pleasure of payment” that is defined as an implicit and consumption‐related hedonic response based on the cue theory of consumption. By tracking spontaneous attention to positive attributes (i.e., benefits) of products, Study 2 demonstrated this implicit pleasure as a psychological mechanism for the mobile payment effect when the pain of paying was not at play. These findings have important implications for mobile payment in research and practice by identifying price level as a boundary condition for the role of pain of paying and understanding the positive downstream consequences of mobile payment usage on consumer psychology.
... But we can say that the single entry or incomplete system working in the process of mental accounting. compared to this, there is double entry mental accounting (Prelec & Loewenstein, 1998). It is in connection with payment coupling and decoupling with the consumption. ...
... So here, when an individual going for double entry means payment and consumption entry made at the same time, and it hurts. so, in the context of mental accounting, double entry is painful (Prelec & Loewenstein, 1998). ...
... When it is in different time period, it is less painful. So, in the case of mental accounting, individuals prefer a single entry, because the double entry hurts (Prelec & Loewenstein, 1998). With regard to revenue recognition, it is concerned with recording revenue when the sale is made (NCERT, 2021). ...
Article
This paper makes a novel attempt to analyse the mental accounting process through the eyes of financial accounting. Financial accounting is pretty familiar in the accounting and overall commerce domain. But still, mental accounting is not much familiar among the masses. Financial accounting is a process that is employed by those companies which are supposed to follow the process by law. But the interesting fact is that every person is knowingly or unknowingly going through the mental accounting process in their day-to-day life. So, the paradox is that people are knowingly or unknowingly people involved but they are not familiar with that. The awareness of mental accounting can put people into an uncomfortable position as they are comfortable in feeling they are rational. Even though it is said unfamiliar to many, it has got a rich existing literature in its mother field of behavioural economics.
... Thaler introduced the concept of mental accounting in 1980 (Thaler, 1980). Subsequently, in studies on consumer preferences, scholars proposed the Double-Entry Mental Accounting Theory to conduct psychological analyses of consumer behavior (Prelec & Loewenstein, 1998). This theory posits that individuals, during their decision-making processes, categorize and weigh external stimuli and their own psychological states into two separate mental accounts: the "benefits account" and the "cost account". ...
... This dualchannel mental accounting differs from the "debit" and "credit" in traditional accounting:1)In accounting, "debit" and "credit" record actual monetary income or payments.2)In contrast, the dual-channel mental accounting records the "Pleasure of Consumption" and the "Pain of Paying" (Prelec & Loewenstein, 1998).The "pleasure of consumption" and the "pain of paying" accompany every consumption process. Consequently, the dual-channel psychological calculation rules significantly influence people's consumption decisions. ...
... Cheema and Soman (2006) state that the mental accounting construct is a metaphor used in purchasing decision-making because of its usefulness in an empirical phenomenon concept. Mental accounting is a cognitive form of bookkeeping that individuals do to check spending and control consumption (Gourville and Soman, 1998; Prelec and Loewenstein, 1998;Thaler, 1985Thaler, , 1999, in limiting spending people often use mental accounting by limiting budget allocations to certain categories (Heath and Soll, 1996). Similarly, in organisational accounting, one would do a cost-benefit analysis. ...
... Various studies reveal that the workings of the mind do resemble the accounting system that is widely discussed in conventional or mainstream accounting literature (Guven and Sorensen, 2012; Thaler and Sunstein 2008). Prelec and Loewenstein (1998) point out that there is another role of mental accounting, namely special transactions, where a person organises an account for transactions, expenses, and consumption credits. Mental accounting can also act as a self-regulatory mechanism. ...
Article
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This research was conducted to examine the influence of Accounting Mentality on MSME Performance with growth mindset as an intervening variable. This research uses primary data by distributing questionnaires to micro, small and medium business owners in the Jakarta area. Sampling of 250 respondents was carried out using the purposive sampling method. This research uses a data analysis method, namely Partial Least Square (PLS)-SEM using a data analysis tool, namely SmartPLS 3.0. Research data was analyzed with a structural equation system using SmartPLS.3.2.9 software. The results of this research are that mental accounting does not have a significant influence on micro business performance. Mental accounting has a significant influence on growth mindset. Growth mindset has a significant influence on micro business performance. Growth mindset can be an intervening variable in the relationship between mental accounting and micro business performance.
... Behavioural biases like Representativeness, Availability bias, Anchoring bias, Herd effect, Mental accounting, Gamblers' fallacy, Overconfidence and Regret aversion are the apparent biases in investment. (Kahneman and Tversky, 1979); (Benartzi and Thaler, 1995;Prelec andLoewenstein, 1998 andThaler, 1999). ...
... Behavioural biases like Representativeness, Availability bias, Anchoring bias, Herd effect, Mental accounting, Gamblers' fallacy, Overconfidence and Regret aversion are the apparent biases in investment. (Kahneman and Tversky, 1979); (Benartzi and Thaler, 1995;Prelec andLoewenstein, 1998 andThaler, 1999). ...
Article
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This study focuses on investors' investment decision-making and examines the influence of multiple intelligences in investment decision-making, both rational and irrational. Multiple intelligences are a group of Intelligence with its entity and domain. Gardner suggests that the human being has different individual units of intellectual functioning. He labels these units as intelligence, each with identifiable and quantifiable aptitudes. The nine intelligence types differently influence an individual's behaviour and decisions. The multiple intelligence Inventory and a questionnaire on investment decision-making were used for data collection from a hundred investors. Analysis was done with the help of Pearson's correlation, multiple regression chi-square test, and correspondence analysis. Rational decision-making is intellectual, as per the review, and it is proved here that intelligence influences rational decision-making significantly while the other is not influenced. The observed results help to get new visions of investment behaviour, including a new proof of the root causes of investment decisions.
... Previous studies evaluating the determinants of personal indebtedness have shown that the pain of paying plays an important role in consumer self-regulation (Prelec & Loewenstein, 1998); that individuals with present bias are more likely to have credit card debt (Meier & Sprenger, 2010); that successful money management reduces the willpower needed to control nancial behavior and helps prevent and combat over-indebtedness (Kamleitner et al., 2011), 2011); that individuals' impulsiveness when making decisions has a signi cant in uence on indebtedness (Ottaviani & Vandone, 2011); that a lack of selfcontrol and nancial illiteracy are positively associated with excessive indebtedness (Gathergood, 2012); that there is a signi cant difference in the level of indebtedness according to age, gender, marital status, education, religion, religious principles, occupation, household income, credit card and credit addiction (Flores & Vieira, 2014); that impulsivity fully mediates the impact of nancial literacy on debt (Ottaviani & Vandone, 2018); that overcon dence has been associated with a series of negative nancial behaviors and outcomes (Atlas et al., 2019); and that people who are overcon dent in their nancial abilities tend to borrow more than less con dent individuals (Hauff & Nilsson, 2020). ...
... The literature reviewed highlights Mental Accounting as a prominent cognitive bias in relation to individuals' indebtedness. This bias causes a dissonance between the pleasure of consuming and the pain of paying (Prelec & Loewenstein, 1998), leading people to make mistaken predictions about future consumption (Hersh eld et al., 2015), mainly due to the fact that they can accumulate savings and get into debt at the same time (Sussman & O'Brien, 2016). In this sense, the decision to consume and go into debt is in uenced by the mental accounting bias (Argyle et al., 2020), which can lead to errors in judgment and nancial losses. ...
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Objective The level of indebtedness of individuals has increased significantly in recent decades. The objective of this study was to analyze the scientific literature that evaluates the interrelationships between behavioral biases and personal indebtedness, with a view to investigating the intellectual structure of publications on the influence of behavioral biases on the level of personal indebtedness. Methodology Bibliometric analysis of scientific publications carried out until October 2023 in the "Web of Science" and "Scopus" databases and which analyze determinants of personal indebtedness from the perspective of behavioral sciences was used. Results The results reveal works with global and local relevance, how indebtedness has been discussed from a behavioral perspective and the main cognitive biases associated with it, research clusters that can serve as a reference for researchers, trends and research gaps in this field of knowledge, and that combining constructs from the field of behavioral sciences with other areas of knowledge, especially education/knowledge and psychology/behavior, tends to expand the literature related to personal indebtedness. Originality Based on the content analysis of the articles, an innovative scheme illustrating the possible definitions of indebtedness from an economic and psychological perspective is presented, which is an important contribution to the literature.
... Finally, our findings relate to a larger literature on mental accounting and how different sources of money or accounts may be viewed differently by individuals (see e.g. Prelec and Loewenstein, 1998). Hastings and Shapiro (2018) find evidence that the marginal propensity to consume SNAP-eligible foods out of SNAP benefits is much larger than the marginal propensity to consume these foods out of cash. ...
... There, ''mobile money'' partly means money send by an adult child, spouse, or sibling to help pay for health and education and other needs. Thus, mobile money is differentiated from both credit cards and cash in a way aligned with sociological notions of the ''social meaning of money'' (Zelizer, 1994), behavioral notions of mental accounts (Prelec and Loewenstein, 1998), and more direct notions of control as shown by Riley (2024)'s demonstration of ways that mobile money can sometimes be better protected from claims made by others. ...
Article
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Behavioral household finance shows that people are often more willing to spend when using less tangible forms of money like debit cards or digital payments than when spending in cash. We show that this ‘‘payment effect’’ cannot be generalized to mobile money. We surveyed families in rural Northwest Bangladesh, where mobile money is mainly received from relatives working in factories. The surveys were embedded within an experiment that allows us to control for the relationships between senders and receivers of mobile money. The finding suggests that the source of funds matters, and mobile money is earmarked for particular purposes and thus less fungible than cash. In contrast to the expectation of greater spending, the willingness to spend in the rural sample was lower by 24 to 31 percent. In urban areas, where the sample does not receive remittances on net, there are no payment effects associated with mobile money.
... Thus, H1 was given support. This confirmation is consistent with previous explanations for interpreting consumer spending decisions with cash and credit cards, such as the temporal separation of the consumption decision and the actual payment (Prelec & Loewenstein, 1998), pain of payment (Prelec & Loewenstein, 1998;Raghubir & Srivastava, 2008), and consumers' focuses on cost-related aspects and benefit-related aspects (Chatterjee & Rose, 2012). The index of the moderated mediation model (represented by CM 1) was significant (Effect = 1.42; 95% CI [0.92, 1.95]), suggesting that COVID-19 moderated the effect of the focal predictor (degree of contact) on the mediator (disgust), and subsequently on the dependent variable (spending intention). ...
... Thus, H1 was given support. This confirmation is consistent with previous explanations for interpreting consumer spending decisions with cash and credit cards, such as the temporal separation of the consumption decision and the actual payment (Prelec & Loewenstein, 1998), pain of payment (Prelec & Loewenstein, 1998;Raghubir & Srivastava, 2008), and consumers' focuses on cost-related aspects and benefit-related aspects (Chatterjee & Rose, 2012). The index of the moderated mediation model (represented by CM 1) was significant (Effect = 1.42; 95% CI [0.92, 1.95]), suggesting that COVID-19 moderated the effect of the focal predictor (degree of contact) on the mediator (disgust), and subsequently on the dependent variable (spending intention). ...
Article
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Plain Language Summary Do consumers spend more using contactless payments under COVID-19 pandemic? Sanitation has become a major concern due to contagious feature of COVID-19. Under disease-rich environments, contact could be perceived as a contamination and disgust-inducing cue. There is surprisingly lack of research in degree of contact of payment and its influence on spending behavior since people tend to normatively believe that money is dirty. To test this, a 2 (degree of contact: Contactless payment vs. Contact payment) × 2 (consumption context: COVID-19 condition vs. Normal condition) between-subjects design was employed. This study further proposes and empirically tests two theoretical frameworks to explore its psychological mechanisms and boundary conditions. Results indicate that degree of contact as a payment attribute negatively influence spending intention, specifically, contact payment increases disgust and negative contamination, thus decreases intention to spend, and COVID-19 pandemic exerts a moderating effect on the relationship. Practitioners will be able to use the findings from this study to improve quality of payment services in the context of COVID-19 pandemic.
... 97-98) has convincingly argued, an over-emphasis on future prudential goods often results from various future-biased affective tendencies, which he also describes as "hyperopic" tendencies. 15 One example of such a tendency is the "pain of spending" (Prelec & Loewenstein, 1998), i.e., negative feelings related to the spending of money which may lead to "underspending" rather than "overspending." Other 14 Interestingly-and rather in line with the point just made-nothing in Brownstein's description of the case (Brownstein, 2018, p 586) suggests that Alfred finds the prospect of having ice cream for dinner in any way attractive. ...
... Maria Doulatova raised a similar objection.22 Recall the aforementioned finding that it is not uncommon to experience a "pain of spending"(Loewenstein 2018;Prelec & Loewenstein 1998). Thrift behavior may, then, simply be driven by a desire to avoid that "pain" or perhaps even by something like a "pleasure of saving". ...
Article
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Although it seems commonsensical to say that one cannot merely have too little, but also too much self-control, the philosophical debate has largely focused on failures of self-control rather than its potential excesses. There are a few notable exceptions. But, by and large, the issue of having too much self-control has not received a lot of attention. This paper takes another careful look at the commonsensical position that it is possible to have too much self-control. One key insight that will emerge is that there are certain important confusions surrounding this view. Once these are removed, however, we are led to the conclusion that there need not be anything intrinsically problematic about being a paragon of self-control.
... Studies on anchoring bias (Tversky and Kahneman 1974;Epley and Gilovich 2006) reveal how initial reference points influence subsequent judgments and decisions. Mental accounting studies (Thaler 1985;Prelec and Loewenstein 1998) explore how investors categorize money and make financial choices based on subjective criteria. ...
Article
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Demographic factors of investors have an important role in the behavior pattern of stock investors. The study focuses on analyzing impact of investors’ demographic factors such as age, gender, and educational level of retail investors in Delhi-National Capital Region. Past research has shown that investors display behavioral biases in investment decisions. These behavioral biases are nothing but the impact of perceptions and emotions of the investors. This research aims to check whether these biases vary based on gender, age, and education of investors. The retail investors from Delhi-National Capital Region were approached and their responses were collected for five behavioral biases i.e. overconfidence; anchoring; herding; loss aversion and mental accounting. Independent sample t-tests and ANOVA were used to assess survey data from 806 individual investors in Delhi-National Capital Region and to investigate the statistically significant differences. This study covers overconfidence, anchoring, herd bias, mental accounting bias, and loss aversion biases of investors. In all these biases, female investors are found to be less susceptible to overconfidence bias than male investors. The findings further depict the existence of other biases in investment decisions and how their impact varies based on gender, age, and level of education among investors. Although extensive literature on behavioral finance is available there are very few studies to specifically find out the role of gender, age, and level of education as a significant factor in biased decisions of investors. This study adds to the existing literature by attempting to fill this gap. This study is most pertinent for financial advisors, by way of it assisting them in acquiring a deeper understanding of retail investors’ psychology, thereby enabling them to develop behaviorally adapted portfolios that are customized to their clients’ personalities. The potential limitation of this study can be attributed to stage and resource constraints, as the responses are confined to Delhi-National Capital Region retail investors only.
... However, the number of installment periods may also inhibit consumers' purchases of products. Mental accounting theory highlights that when consumers make purchases, they normally face a dilemma where they must endure the pain of payment before convincing themselves to reach a decision (Prelec & Loewenstein, 1998). With the use of installment payment, consumers need to handle the charge several times according to the specified repayment date (Feng et al., 2023). ...
Conference Paper
Although installment payment has been regarded as a popular payment option on the e-commerce platform, there is an ongoing debate regarding whether it can facilitate product sales. Therefore, to disentangle this mixed understanding, the current study combines econometrics and experiments to test the optimal number of installment periods. The findings of the study show that the number of installment periods has a curvilinear impact on product sales; with the initial increment of installment periods, it can stimulate consumer purchase; however, it has a detrimental effect later on. These results can provide actionable suggestions for retailers to refine their setting of installment payments.
... 1. Design irresistible offers: offer products or services at low initial prices to encourage an initial investment; once the customer has invested, they are more likely to continue purchasing additional products, with the sunk cost effect (Prelec & Loewenstein, 1998). ...
Article
The sunk cost cognitive bias, or sunk cost fallacy, is a human tendency to continue with: an investment, make a decision, business, couple or project based on the resources that have been invested, instead of making a current evaluation of the results. future benefits and costs. The objective of the research was to analyze the impact of sunk cost cognitive bias on customer decisions and its application in neuromarketing strategies. The specific objectives were: (i) Evaluate how sunk cost influences the perception of the value of products or services. (ii) Identify marketing strategies that exploit the sunk cost bias. (iii) Propose strategies to apply the sunk cost bias in marketing. The results show that the sunk cost bias significantly influences the perception of the value of products and services, affecting purchasing decisions, depending on the educational level, gender, and income level that influence the continuity in the use of products and services. due to previous investment of time or money; When purchasing expensive items customers feel obligated to continue using paid more even if it is not useful and used in full. The continuity in prepaid subscriptions, the perception of discounts for large quantities as a way to make better use of money, the probability of participating in loyalty programs for the accumulated rewards, the preference for payments and flexible cancellation, create a valuable perception of products they have previously invested in, the preference for repairing expensive items, and the perception of loss from a previous investment. It is concluded that the sunk cost cognitive bias significantly influences the decisions and behavior of a vast majority of customers, and how companies can use this information to design effective marketing campaigns.
... ATTITUDES, BEHAVIOR, AND INSTITUTIONAL INVERSION 1133 constraints that facilitate or inhibit people from acting. Given forces such as people's tendency to engage in hyperbolic discounting, the ease and seeming "painlessless" of paying with credit (Prelec & Loewenstein, 1998;Shin et al., 2020), and the various techniques that producers use to encourage spending (Akerlof & Schiller, 2015), people who are offered greater amounts of credit may find it relatively easy to run up debt. In contrast, when credit is less available, this is harder to do. ...
Article
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Psychologists often posit relatively straightforward attitude-behavior links. They also often study cultural arrangements as manifestations of attitudes and values writ large. However, we illustrate some difficulties with scaling up attitude-behavior principles from the individual-level to the cultural-level: Historical attitudes and values can lead to the creation of intermediating institutions, whose value-expressive functions may be at odds with the behavioral outcomes they produce. Through “institutional inversion,” institutions may facilitate rather than inhibit stigmatized behavior. Here we examine attitudes and behavior related to debt, contrast historically Protestant versus Catholic places, and show how cultural attitudes against debt may lead to the creation of institutions that increase—rather than decrease—borrowing. Historical anti-debt attitudes in Protestant places have led to contemporary households in Protestant cultures now carrying the highest debt loads. We discuss the importance of supply side factors, attitude --> institutions --> behavior causal chains, and some blind spots that lead to unintended consequences.
... Even outside of such a state, people with gambling problems may have decision-making difficulties that limit their ability to re-reference (Limbrick-Oldfield et al. 2020) and may therefore require more powerful interventions for creating a realization effect. Given our reliance upon a digital and hypothetical cashing out procedure, one clear candidate would be a physical cash transfer, because cash amplifies the impact of losses via the "pain of paying" (Palmer, Cringle, and Clark 2021;Prelec and Loewenstein 1998). ...
Article
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Betting more after losses (i.e., “loss‐chasing”) is a central clinical feature of disordered gambling. According to prospect theory, increasing risk‐seeking following losses could arise from a failure to “re‐reference.” By contrast, successful re‐referencing between successive decisions closes the mental account, and any losses are regarded as final or realized ; gamblers should not chase realized losses. The present study sought to test this “realization effect” among gamblers using an ecologically valid online gambling task. We were further interested in whether the effectiveness of the loss realization varied as a function of problem gambling severity. Using online recruitment of past‐year gamblers stratified on the Problem Gambling Severity Index, we tested a group without gambling problems ( n = 227), a group with at‐risk gambling ( n = 239), and a group with gambling problems ( n = 223). Over a sequence of nine bets, after the sixth bet, half of the participants underwent a simulated realization procedure that entailed cashing out from the gambling website and redepositing their remaining funds on another website. The feedback comparison group were shown their account balance after the sixth bet but did not withdraw or transfer their funds. In line with the realization effect, the group with non‐problem gambling significantly reduced their bet after cashing out. The realization procedure did not significantly ameliorate loss‐chasing in the groups with at‐risk gambling or gambling problems. We conclude that the realization effect can be elicited in an online gambling context but that stronger interventions for realizing losses may be required for people experiencing gambling problems.
... Second, consumers can gain aesthetic appeal and emotional pleasure from a product with a superior appearance (Batra & Ahtola, 1991;Nanda et al., 2008;Reimann et al., 2010). Third, people find that it is more difficult to justify the purchase of a hedonic product than a utilitarian product (Prelec & Loewenstein, 1998;Thaler, 1980). Said differently, purchasing a product with superior appearance and aesthetic value seems to be desirable but less feasible. ...
Article
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Purchasing and renting are two basic modes for consumers to acquire a product. While prior research has investigated which factors affect consumers' choice of renting versus purchasing a product, very limited research studies the outcome of renting versus purchasing a product. Extending this line of research, this paper links product acquisition mode to product attribute preference. Specifically, through a series of eight multimethod studies, including secondary data study, field experiment, and lab experiments, we show that renting a product, as compared to purchasing a product, increases consumers' focus on the product's feasibility aspect rather than its desirability aspect, which in turn drives consumers to prefer the product option with superior function over the one with superior appearance. Furthermore, we show that this rental‐function effect amplifies (attenuates) when the product's brand image is positioned as a mass brand (a luxury brand). This paper uncovers a novel finding of renting products. It also provides practical guidelines for rental companies and marketing managers on how to effectively position their products and optimize advertising strategies.
... First, we extend the literature on the "teasing effect" (Ruan et al., 2018;Sevilla & Meyer, 2020) Second, we examine the teasing effect in a paid content context, revealing potential negative outcomes of this marketing practice. In line with the notion that consumers' thoughts, motivations, and behaviors change when they are reminded of money, more generally (Vohs, 2015), and payment, more specifically (Prelec & Loewenstein, 1998), we offer empirical evidence that reactions to unfinished teasers differ when confronting paid content versus free content (Studies 3a and 3b). Previous research considers temporary interruptions (Kupor & Tormala, 2015) that evoke curiosity by first limiting information and then subsequently revealing it (Sevilla & Meyer, 2020). ...
Article
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To preview digital content and arouse consumers' interest, online providers often use short teasers designed in an unfinished form, such that the teaser begins a new sentence but does not finish it. These teasers aim to create curiosity and trigger consumption of the advertised content. However, we reveal that consumers' reactions to unfinished teasers are not always positive. The results from a qualitative pilot study and five experimental studies show that consumers react negatively to unfinished teasers for paid content, as demonstrated by reduced purchases. This effect reverses for free content, in that unfinished teasers lead to more consumption. We explain this reversal by showing that the barrier associated with paid content (i.e., the payment requirement) activates consumers' persuasion knowledge and suppresses any positive curiosity‐induced effects, which does not occur when content is available for free. These findings offer novel insights into the complexity of consumers' reactions to prevalent advertising techniques designed to promote content consumption in digital marketplaces.
... Whether curbside pickup, physical stores, or e-commerce sites, these technologies or the convenience (Plouffe et al., 2001) they provide in making payments might trigger a certain amount of impulsiveness in our purchasing behavior. According to Prelec and Loewenstein (1998), the term "pain in paying" refers to the period in the past when people were adamant about using their hard-earned money only for necessities because they felt that money had a more excellent value. ...
Chapter
Payment systems play an essential role in the financial well-being of an individual. This chapter explores the connection between the two from India's payment revolution perspective. A multi-dimensional typology encompassing psychological factors and financial outcomes provides comprehensive knowledge of financial well-being. The digital payment ecosystem in India, driven by the Unified Payments Interface (UPI), is a compelling case study. The chapter underscores the significance of access to financial services, financial literacy, financial inclusion, and financial protection in promoting overall well-being. Recent trends highlight the growth of fintech startups and their contribution to expanding access to financial services. Adopting digital payment systems has influenced spending patterns, saving habits, and credit behavior, shaping individuals' financial behavior. However, challenges such as financial inclusion, literacy, and consumer protection need to be addressed.
... noted that the proliferation of modern digital payment methods on gambling sites can result in easy depletion of funds through auto-deposit setting, direct redeposit of wins, or diminished value/lower awareness of spending. Cashless payment is generally found to affect lessening the so-called pain of paying; hence keeping individuals in the 'state of flow' and increasing 'time on device' -which both are associated with funds exhaustion (McGrath, 2006;Prelec & Loewenstein, 1998;Schüll, 2012). However, inconsistent results are reported whether the use of such payment solutions can exuberate harmful gambling (Palmer et al., 2021). ...
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The transformation of gambling into a largely digital commodity has created a need for online payment technologies to facilitate online gambling, thereby also raising the question of what role these actors can play in the promotion of Responsible Gambling (RG). With the means and access they maintain, financial institutions are in a unique position to alleviate financial pitfalls, yet their role in the gambling context has thus far received little scrutiny. The objective of this study was to conduct an extant literature review to develop an initial set of financial indicators tailored for financial institutions, enabling them to engage in the RG initiatives. We conducted a two-step narrative literature review to identify both general Financial Well-Being (FWB) indicators across financial research disciplines, and one specific to gambling. A literature search over the past 20 years was performed across the following academic databases: Medline (Ovid), Sociological Abstracts (ProQuest), Web of Science (Clarivate), and PsycInfo (EBSCO). Manifest content analysis was used in step one to review general financial well-being, yielding a general FWB conceptual framework. In step two, we applied latent content analysis to the gambling-specific literature, linking essential concepts of gambling-related financial harms to the broader FWB literature. This resulted in a tentative taxonomy of indicators applicable to financial institutions with gambling customers. In tandem with the FWB conceptual framework, the preliminary taxonomy could provide a foundation for financial institutions catering to gambling customers to engage in the duty of care agenda, potentially broadening player protection beyond the current operator-focused RG measures.
... However, as discussed by (Brunnermeier and Julliard, 2008), this separation of gains/pleasure and losses/pains may lead to an oversight of the link between them, which may lead to a money illusion where the householders ignore the impact of inflation on mortgage rates and income growth. Additionally, as suggested by (Prelec and Loewenstein, 1998), consumers differentiate between the pleasure of savings and the pain of debt; therefore, as long as the debt is still being paid, the pain still exists. In the housing market, the pain of paying the mortgage may sometimes overshadow the pleasure of owning a house. ...
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The importance of the housing market to households and the economy is paramount to monetary policies. However, there is limited literature on the behavioural factors influencing the decision-making process in the housing market. This article profoundly examines the psychological and neurological factors influencing the housing market. It reviews how cognitive and emotional influences shape the householders, both sellers and buyers, decisions in the housing market. More importantly, we review the literature on neuroeconomics (and neurofinance) to initiate an understanding of how the brain could work in the housing market. In summary, the householders' reactions to information and news are consistent with behavioural finance theories. Householders tend to underreact to news regarding the housing market and often suffer from biases and heuristics. One of the critical effects that householders suffer from is an illusion of control; this could be traced to the emotions of householders towards the house. Householders do not just show positive emotions towards the property; they fall in love with it. This strong emotional bond is one reason buyers overpay and sellers overprice. Both governments and monetary policymakers need to understand the psychology influencing the householders' decision-making process mainly because the housing market is vital to the economy.
... Feinberg (1986 explained that repeated exposure to credit card stimuli during transactions fosters associations between credit cards and spending. Credit cards, by enabling deferred payments, introduce a temporal gap between the decision to purchase and the actual payment, which in turn contributes to increased spending driven by credit card cues (Prelec & Loewenstein, 1998). ...
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This study aims to examine the relationship between credit card cues, credit card associations (especially debt-related thought), and spending behavior in Indonesia. The data were collected through an online survey with 400 respondents and analyzed using PLS-SEM. The result showed that credit card cue has significant positive correlation to debt-related thought. Debt-related thought has no significant correlation to spending. Credit card cue has significant positive correlation to spending. Debt-related thought is not able to moderate credit card cues on spending which refers to direct only mediation.
... With respect to framing effects, results from neuroeconomics show that gain and loss frames reflect a deeper "affect heuristic" 19 through which people incorporate emotional information into the decision process, as evidenced by increased activity in the amygdala (De Martino et al., 2006). Similarly, mental accounting, a cognitive process that has been used to explain framing effects (Thaler, 1985(Thaler, , 1999, can also be understood in light of the feelings it triggers (Prelec & Loewenstein, 1998;Thaler, 1999). The concept of emotional accounting further demonstrates the importance of bodily states in mental accounting (Levav & Mcgraw, 2009), and Zelizer's (1989) sociological approach to mental accounts can further open the analysis to social influences. ...
Chapter
Departing from its Smithian origins, with the development of marginalism and its mathematization in the 1930s, economics has developed disembodied theories, abstracted from human and social realities. Disembodiment is characterized by the use of the computer metaphor for both agents and markets defining economic action as abstract processing of information. This was underpinned by three main motivations: Achieving disciplinary autonomy from psychology and sociology; formalizing the normative presumption of individual freedom; and employing a reductive explanatory approach to the complex behavior of large agent populations. The standard disembodied model treats prices as carriers of information and parameters of rational decisions, whereas the argument presented here is that prices become information only when interpreted by living human beings in social contexts. New approaches seem to re-embody economics, namely, behavioral, experimental, and neuroeconomics. However, they remain incoherent and inconclusive regarding embodiment because economics follows a deductive nomological understanding of explanation, as does physics.
... Pain of payment is the psychological pain that is perceived at the point of purchase (Zellermayer, 1996). Prelec and Loewenstein (1998) find that pain of payment is moderated by the degree of perceived proximity between the point of purchase and actual payment as a psychological decoupling effect. Specifically, consumers are less likely to perceive pain of payment during cash payments because the purchase and actual payment are completed simultaneously. ...
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This study investigates the effects of consumers’ psychological ownership (PO) of payment methods on their willingness to pay (WTP) and willingness to accept (WTA). We conducted two experiments that focused on two types of payment methods: cash and mobile payments. In Experiment 1, participants were asked to read a fictitious purchasing scenario. We verified that a payment method with a lower PO tended to be selected at the point of purchase, resulting in a higher WTP. In Experiment 2, participants were assigned to read two of four fictitious buying and selling scenarios. We found that the payment method with a greater PO tended to be selected at the point of receipt, resulting in a lower WTA.
Article
Raising the price of municipal water services is highly fraught in many countries due to the political pressures to keep water bills affordable. As a result, most countries fail to recover the full costs of water provision, a problem made worse by an underestimation of the real cost of providing water. The case of Singapore illustrates that this problem is in part due to “mental accounting,” which is consistent with Lasswell’s concept of an “intelligence function.” Situating an understanding of this intelligence function within the Singapore water case gives a better understanding of the reluctance to raise water prices.
Article
Purpose This study aims to utilize the theory of planned behavior, integrating materialism, financial socialization, and perceived financial capability, to explore the psychological determinants influencing credit card repayment behaviors. Design/methodology/approach The data for this research was sourced from the 2016 National Financial Well-Being Survey. Employing Structural Equation Modeling, this study investigated whether materialism, financial socialization, and perceived financial capability influenced credit card repayment behaviors through their impact on financial intention. Findings The analysis suggests significant associations between materialism, financial socialization, and perceived financial capability with credit card repayment behaviors. Furthermore, the results highlight the substantial mediating role of financial intention in shaping the relationship between materialism, financial socialization, perceived financial capability, and credit card repayment behaviors. Research limitations/implications Employing Structural Equation Modeling, the study investigated whether materialism, financial socialization, and perceived financial capability indirectly influenced credit card repayment behaviors through their impact on financial intention. Practical implications The findings of this study underscore the importance of considering credit card utilization and leverage used by average consumers. Supporting community-based financial education programs might be useful for reaching individuals and families at the grassroots level and educating participants about the deleterious effects of maintaining high credit card balances and the perils of pursuing their materialistic desires by leveraging these purchases through the utilization of credit cards. Credit card companies can use these findings to inform their marketing strategies and design credit products that cater to the needs of different segments of customers. From a policy standpoint, it is extremely important to develop programs that protect those individuals who are most vulnerable and need the most help with managing their money. Social implications Policy makers can also use these findings to develop regulations and consumer protection measures to promote responsible credit card use. For instance, they can introduce laws that require credit card companies to disclose the full cost of credit, including interest rates, fees, and charges, in a clear and transparent manner. They can also promote financial education programs to help individuals with high levels of materialism manage their credit card usage and debt. Originality/value The paper integrates two well-established theoretical frameworks, the theory of planned behavior and materialism, to provide a comprehensive understanding of consumer credit card usage. This integration allows for a more nuanced analysis of the factors influencing credit card behavior. By utilizing data from the 2016 National Financial Well-Being Survey and employing Structural Equation Modeling (SEM), the paper conducts a robust empirical investigation. This adds credibility to the findings and allows for the testing of hypotheses derived from the theoretical frameworks. The findings of the paper have practical implications for policymakers, financial institutions, and consumer advocates.
Article
Purpose The purpose of this paper is to investigate the effect of reward redemption programs on donation amount, donation percentage and donation intention in the context of a bank credit card. Design/methodology/approach A 2 × 2 × 3 experiment is implemented with 1,070 consumers accessing a national US-based sample with a small compensation. The authors use general linear model to test the proposed hypotheses. Findings The findings show the main effects of reward types, limited-time message and value of reward redemptions on the percentage of donations and overall donation intention to charity. The type of reward (cash/points) is found to interact with the limited-time message and with the value of reward redemptions. Originality/value No prior studies have addressed the relationship between credit card redemption rewards and scarcity messages in the donation context. The study contributes to the understanding of the effectiveness of credit card redemption rewards with scarcity message in improving a consumer’s donation intention.
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Although the literature on upselling has investigated different aspects of inducing upselling, there are limited discussions of the effect of past transactions on customers’ acceptance of upsells. Building on the expectation-confirmation and reference dependence theories, this study utilized mixed-effect regression analysis to explore the extent to which customers’ acceptance of upsells changes in response to their prior experience of unexpected gains via free upgrades. The results show that customers accept and spend more on upselling offers when they have experienced a free upgrade in a past transaction and that the effect of the free upgrade on upselling is positively moderated by the level of employee engagement.
Article
Purpose Despite evidence that cashless payment modes influence spending behavior, researchers have yet to explain the underlying mechanism. Cash serves as a store of value, and transactions involve the transference of ownership in circulation. This study aims to unpack why the physical and visceral nature of cash embodies psychological ownership and how the physicality of cash attenuates the awareness of spending, curtailing instinctive and unnecessary spending. Design/methodology/approach Drawing on data collected in 2013 in New Zealand, the authors conducted another study in the quite different context of China in September 2023, using identical semistructured discussion protocols. The data from 2013 involved five focus group sessions containing at least six participants, involving 31 adults who also completed an open-ended questionnaire immediately before the group discussion commenced. The data collection in 2023 used the same open-ended and semistructured discussion protocol used in 2013, resulting in 180 adult open-ended responses – a nonprobability criterion-based purposive sampling guided participant selection in the 2013 and 2023 studies. Findings Findings reveal that psychological ownership does manifest in the app more than in the ownership of money itself. People felt happy, confident, safe and secure while using apps that stored their money. Physical attributes of cash result from sensory perceptions of handling, counting and touching cash and coins. A sense of psychological ownership heightens spending awareness and ramifies spending behavior. The research found sadness and guilt as negative emotions when parting with money. Originality/value This study offers empirical support to explain why psychological ownership of cash regulates spending and why the psychological processes that underlie “owned” money interrupt the spending with cash.
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Digital lending has emerged as a disruptive force in the financial industry's ever-changing landscape, transforming the way customers access and manage credit. BNPL products have grown in popularity, particularly among the younger generation, because to their ease of use, flexibility, and seamless integration into online purchasing experiences. Consumers can use these services to break their payments into smaller, interest-free installments, providing an alternative to standard credit products and payment methods. However, the potential costs to consumers have not been quantified. The study results suggest that BNPL consumers face financial charges that are on par with credit card fees and are vulnerable to unfavorable risks due to loopholes in customer protection. Customers face varying expenses both before and after they go into default on BNPL repayments, with the annual percentage rate (APR) ranging from 0% to 36%.
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In questa tesi di laurea presentata all'Università degli Studi Guglielmo Marconi vengono approfondite principalmente due tematiche particolarmente indigeste per l’Italiano medio e molto criticate dai tradizionali media: il web3 ed il metaverso. Il titolo della tesi non è da sottovalutare. “Peeking into the future” vuol dire letteralmente “una sbirciata al futuro” proprio perché nella dissertazione si cerca di dimostrare con dati oggettivi il motivo per il quale questi elementi faranno parte del nostro futuro. In ciascuno dei capitoli - i quali racchiudono il funzionamento ed i processi di queste nuove tecnologie - vengono affrontate tematiche molto spinose, alcune tra queste sono la sostenibilità ambientale della blockchain, i fallimenti dei colossi web2 (FAMGA), l’utilità degli NFT (Non Fungible Token). Ciò non s'intenda che il lavoro in questione sia una pura marchetta verso tali tecnologie, piuttosto l'oggettività nel valutare i pro ed i contro di questi elementi è risaltata: seppur è vero che il potenziale sia elevato, rimangono ancora diverse défaillance. Ovviamente i riferimenti ad un settore importante come il marketing sono numerosi: a partire dalla sostenibilità ambientale (si parla di green marketing ma anche di green washing), casi studio di marketing nel settore web3 ed NFT, previsioni di mercato, analisi del comportamento del consumatore e tipologia di buyer persona, CRM, brand positioning. Tuttavia, la parte più interessante, ossia quella sperimentale rinvenibile nell'ultimo capitolo, tratta della possibilità dell’integrazione di queste tecnologie avanzate in un'ottica puramente aziendale. Vengono fornite nuove configurazioni più aggiornate rispetto alle tradizionali analisi che ormai risultano obsolete per le nuove aziende digitali le quali non riescono ad imprimere un benchmark corretto delle prestazioni e della propria posizione di mercato. Si illustrano gli studi di matrici ex novo, cucite ad hoc per le aziende di nuova generazione, per aumentare il proprio vantaggio competitivo. Per quanto questi termini risultino ancora molto lontani dall'utenza, la crescente diffusione del web3 e del metaverso rappresenta una grande opportunità per le aziende e dunque per il settore del marketing. Grazie alla loro capacità di offrire esperienze coinvolgenti e personalizzate, queste tecnologie rivoluzioneranno il modo in cui le aziende raggiungono e coinvolgono i propri clienti. In questo nuovo ecosistema digitale, solo le aziende più innovative e attente alle esigenze dei propri clienti saranno in grado di emergere e avere successo. È importante che le aziende siano pronte ad adattarsi a questo nuovo scenario e a sfruttare appieno le opportunità offerte da queste nuove tecnologie, per garantire il successo delle proprie attività nel futuro digitale.
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Why do individuals pay debt interest when they could use their savings to pay down the debt? We explore why individuals “cohold” debt and savings using detailed and highly disaggregated daily-level data on household finances. We find that coholding mostly occurs in short spells within the month and the level of coholding is typically modest. Periods of coholding are not associated with shocks at the individual level. We show that mental accounting has a role to play in explaining coholding, in particular how individuals allocate different categories of expenditure to accounts in credit and debit. (JEL D12, D14, D15, G51)
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Veterinary fees can be a source of great pain, not just for clients, but also for the clinic teams that are communicating them. It's a common misconception that fees need to be lowered if we wish to make them feel more comfortable to clients, or to make their communication easier for teams; however, because the human mind perceives price in a very subjective way, there is a lot that can be done to help teams communicate them more confidently and to make them feel more comfortable to clients. An understanding of a few behavioural science principles can give veterinary teams the tools that they need to achieve this.
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Online product pricing is an important research field in the platform economy, and a two‐stage mixed presale is a mainstream mode of online sales. In the process of online consumption, the payment method and presale mode have an important impact on consumer behaviour and product pricing. Based on the two‐stage mixed presale mode, this study considers the impact of anchoring and the payment pain reduction effect on consumer behaviour, establishes the corresponding product pricing model and obtains the optimal presale price, sales and profit. It sheds light on the influence mechanism of anchoring and the payment pain reduction effect on consumer behaviour and online product pricing. Theoretical and numerical analyses reveal that the payment pain reduction effect can help to raise the product price, stimulate market vitality and bring higher profits for online retailers, and the anchoring effect and consumers' loss aversion psychology can enhance the profits and sales of online retailers, but they will discourage setting high prices for products. The research results will further enrich the relevant research on customer behaviour and product pricing in the platform economy and will provide decision bases for platform enterprises and online retailers to participate in presale activities and formulate product pricing strategies.
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Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously receive a new payment card, without requesting one. Using random variation in the time of receipt, we show that individuals temporarily increase total consumption expenditure by making purchases with the new card without reducing spending on the others. We do not observe a corresponding increase in indebtedness. Total consumption expenditure rises even for the least liquidity-constrained individuals. The evidence is consistent with consumers treating methods of payment as nonfungible budget categories, as suggested by models of mental accounting and narrow bracketing.
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We provide evidence of the existence of debt aversion and its negative implications for financial decisions. In a new experimental design where subjects are assigned debt randomly, we quantify the opportunity cost of subjects’ debt-biased decisions. One-third of our participants neglect high returns and focus instead on debt repayments. In addition, borrowing to invest is 50 percent less likely when it leads to indebtedness. On average, participants perceive 1lessindebtasequivalentto1 less in debt as equivalent to 1.03 in savings. Hence, a debt-averse agent will undertake a 10 percent guaranteed investment only if the cost of borrowing does not exceed 6.80 percent. (JEL C91, D91, G51)
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This paper conceives mental accounting along Kahneman's “mental economy,” specifically as a heuristic. This mental‐accounting‐as‐heuristic conception allows us to solve the calculator‐jacket puzzle. The opportunity cost of time is not constant but roughly varies with the variation of the item's value. As the value of the item rises, the decision maker (DM) should be more attentive. However, the measurement of the opportunity cost of time at each point of purchase is cognitively costly. To reduce such cost, the DM adopts a heuristic, the item's price itself, as a rough proxy of the varying opportunity cost of time.
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Social scientists have found that satisfaction with an outcome is positively related not just to the position (i.e., actual level) of the outcome, but also to the displacement (i.e., directional difference) between the current level and a reference level. Extending the displacement notion, the present research hypothesized that satisfaction is positively related to the velocity (i.e., rate) at which the outcome changes over time, and tested this hypothesis by using hypothetical outcomes presented in questionnaires (Study 1) and displayed on a computer screen (Study 2). Results from both studies supported the hypothesis. The findings are discussed with regard to their implications for a formal model of the outcome-satisfaction relationship and for a dynamic analysis of human behavior. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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Existing models of intertemporal choice normally assume that people are impatient, preferring valuable outcomes sooner rather than later, and that preferences satisfy the formal condition of independence, or separability, which states that the value of a sequence of outcomes equals the sum of the values of its component parts. The authors present empirical results that show both of these assumptions to be false when choices are framed as being explicitly defined sequences of outcomes. Without a proper sequential context, people may discount isolated outcomes in the conventional manner, but when the sequence context is highlighted, they claim to prefer utility levels that improve over time. The observed violations of additive separability follow, at least in part, from a desire to spread good outcomes evenly over time. (PsycINFO Database Record (c) 2012 APA, all rights reserved)
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A new model of consumer behavior is developed using a hybrid of cognitive psychology and microeconomics. The development of the model starts with the mental coding of combinations of gains and losses using the prospect theory value function. Then the evaluation of purchases is modeled using the new concept of “transaction utility.” The household budgeting process is also incorporated to complete the characterization of mental accounting. Several implications to marketing, particularly in the area of pricing, are developed.
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Normative discounted utility theory specifies that the values of all future outcomes (for example, those related to health and money) should be discounted at a constant rate. Two experiments demonstrated that, contrary to this prescription, decision makers use different discount rates for health-related decisions and money-related decisions. Temporal discountings for health and money were similar in that both demonstrated two biases previously found in monetary decisions: discount rates were inversely related to magnitude of outcome and length of delay. The relatively large discount rates used by the subjects suggest why it is often difficult to implement preventive health measures that improve future health.
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Self-control, mental accounting, and framing are incorporated in a behavioral enrichment of the life-cycle theory of saving called the behavioral life-cycle hypothesis. The key assumption of the behavioral life-cycle theory is that households treat components of their wealth as nonfungible, even in the absence of credit rationing. Specifically, wealth is assumed to be divided into three mental accounts: current income, current assets, and future income. The temptation to spend is assumed to be greatest for current income and least for future income. Considerable empirical support for the behavioral life-cycle theory is presented, primarily drawn from published econometric studies. Copyright 1988 by Oxford University Press.
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Subjects were exposed to two aversive experiences: in the short trial, they immersed one hand in water at 14 °C for 60 s; in the long trial, they immersed the other hand at 14 °C for 60 s, then kept the hand in the water 30 s longer as the temperature of the water was gradually raised to 15 °C, still painful but distinctly less so for most subjects. Subjects were later given a choice of which trial to repeat. A significant majority chose to repeat the long trial, apparently preferring more pain over less. The results add to other evidence suggesting that duration plays a small role in retrospective evaluations of aversive experiences; such evaluations are often dominated by the discomfort at the worst and at the final moments of episodes.
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In this volume a diverse group of economists, philosophers, political scientists, and psychologists address the problems, principles, and practices involved in comparing the well-being of different individuals. A series of questions lie at the heart of this investigation: What is the relevant concept of well-being for the purposes of comparison? How could the comparisons be carried out for policy purposes? How are such comparisons made now? How do the difficulties involved in these comparisons affect the status of utilitarian theories? This collection constitutes the most advanced and comprehensive treatment of one of the cardinal issues in social theory.
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The economic theory of the consumer is a combination of positive and normative theories. Since it is based on a rational maximizing model it describes how consumers should choose, but it is alleged to also describe how they do choose. This paper argues that in certain well-defined situations many consumers act in a manner that is inconsistent with economic theory. In these situations economic theory will make systematic errors in predicting behavior. Kanneman and Tversey's prospect theory is proposed as the basis for an alternative descriptive theory. Topics discussed are: undeweighting of opportunity costs, failure to ignore sunk costs, scarch behavior choosing not to choose and regret, and precommitment and self-control.
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This monumental study is a comprehensive critical survey of the policy preferences of the American public, and will be the definitive work on American public opinion for some time to come. Drawing on an enormous body of public opinion data, Benjamin I. Page and Robert Y. Shapiro provide the richest available portrait of the political views of Americans, from the 1930's to 1990. They not only cover all types of domestic and foreign policy issues, but also consider how opinions vary by age, gender, race, region, and the like. The authors unequivocally demonstrate that, notwithstanding fluctuations in the opinions of individuals, collective public opinion is remarkably coherent: it reflects a stable system of values shared by the majority of Americans and it responds sensitively to new events, arguments, and information reported in the mass media. While documenting some alarming case of manipulation, Page and Shapiro solidly establish the soundness and value of collective political opinion. The Rational Public provides a wealth of information about what we as a nation have wanted from government, how we have changed our minds over the years, and why. For anyone interested in the short- and long-term trends in Americans' policy preferences, or eager to learn what Americans have thought about issues ranging from racial equality to the MX missile, welfare to abortion, this book offers by far the most sophisticated and detailed treatment available.
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This paper suggests an alternative to the weighted average utility maximization as a criterion for multiperiod decisions. A weakened version of Savage's sure-thing principle, imposed on Schmeidler's nonadditive measure model, yields decision rules which involve a weighted average of utility, as well as a weighted average of the utility's variation between each two consecutive periods. The analysis allows for definition and characterization of variation aversion, liking, and neutrality. Copyright 1989 by The Econometric Society.
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This paper presents a model of intertemporal choice that incorporates "savoring" and "dread"-i.e., utility from anticipat ion of delayed consumption. The model explains why an individual with positive time preference may delay desirable outcomes or get unpleas ant outcomes over with quickly, contrary to the prediction of convent ional formulations of intertemporal choice. Implications of savoring and dread for savings behavior, empirical estimation of discount rate s, and public policy efforts to combat myopic behavior are explored. The model provides an explanation for common violations of the indepe ndence axiom as applied to intertemporal choice. Copyright 1987 by Royal Economic Society.
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Research indicates that decisions are affected by how outcomes are framed. Mental accounting is a type of framing in which individuals are hypothesized to form psychological accounts for the costs and benefits of outcomes. Prior research has focused on mental accounting′s consequences rather than its determinants. Thus, little is known about the processes that underlie mental accounting. This study investigates the role that temporal contiguity (the co-occurrence of multiple outcomes) plays in mental accounting for consumer-borrowing decisions. Thaler′s (1985) extension of Kahneman and Tversky′s (1979) Prospect Theory was used to predict that consumers will prefer to finance purchases of goods with loans whose terms correspond with the life of the good. The results of four experiments involving 131 MBA students provide support for this prediction. The present study adds to our knowledge of mental accounting by examining the effect of temporal contiguity in the domain of multi-period costs and benefits. It also adds to the consumer behavior literature by examining an important factor affecting debt utilization.
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Demand estimation and welfare analysis for telecommunications services have often been plagued by apparent inconsistencies between actual consumer behavior and standard economic theory. The latter posits that consumers will subscribe to services when their consumer's surplus exceeds the subscription price. This paper presents an alternative model of subscription behavior under uncertainty. Drawing on the option value literature, we show that expected consumer's surplus is generally not an adequate basis for subscription decisions. We present an empirical example in which option value significantly improves demand estimation. We discuss policy implications, including possible ‘market failures’ in which socially beneficial new technology is not deployed.
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In this paper, we develop a theory of individual choice called melioration, which implies that choices distributed over a period of time may be reliably and predictably suboptimal, in terms of the person's own preferences. Consider some typical examples of distributed choices: the expenditure rate on various non-durables; frequency of athletic exercise; rate of work in free-lance type occupations; allocation of leisure time; rate of savings (or dissavings); expenditures on lottery tickets, and other forms of gambling. When people express dissatisfaction about their choices, their discontent seems clustered around these sorts of distributed choices. For example, complaints that one is working too hard (or not hard enough), exercising too little (or too much), wasting time, overeating, overspending, and so on are commonplace. The next two sections of the paper spell out the basic theory we are proposing. The following section then applies the theory to "pathological" consumption patterns, and shows that one should find a general underinvestment in those activities that exhibit increasing average returns to rate of consumption, and an overinvestment in activities that have an addiction-like interaction between value and rate. The final section compares the theory with other approaches to suboptimal choice.