mental accounting

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Other professional sports leagues in the U.S. hold their all-star games in cities where one of their teams plays. Not the NFL, which plays the game in Hawaii. This has not always been the case. The NFL moved the game to Hawaii in 1979 (and the 2009 game was played in the Miami Dolphins’ stadium). In the original version of his 1985 paper “Mental Accounting and Consumer Choice,” (gated copy here) Thaler offers the following observation:

“For years the league had trouble getting players to come to the year-end All-Star game. Many players would beg off, reporting injuries. A few years ago the game was switched to Hawaii and a free trip for the player’s wife or girlfriend was included. Since then, no-shows have been rare.”

Translation: Value of a free trip for the family (retail value $10,000) > Value of a $10,000 bonus for playing in Pro Bowl.

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When the price of gas goes up, people switch from premium to regular. They don’t switch from Tropicana to private label orange juice. That’s the very narrow takeaway from Justine Hastings and Jesse Shapiro’s paper on how gas price changes affect other consumer purchases.

The larger takeaway is that consumers use various mental accounts to keep track of different purchases. When the price in one mental account increases, consumers don’t ease the pain of that loss by shifting purchases across a variety of other budgets. Instead they make more dramatic changes in their purchasing choices in the category with the price increase – hence, they switch gas grades. They end up acting as if they are poorer than they really are. That’s where the orange juice comes in.

Does this behavior go beyond the pump? Because some customers held retailer loyalty cards with the grocery store, Hastings and Shapiro were able to track other purchases. They looked at sales of half-gallon cartons of orange juice. They found that while customers were drastically scaling back from premium to regular gasoline, this behavior did not spill over into drastically different orange juice purchases. Gasoline prices affect orange juice purchases in the same way that changes in income do.

A pdf of paper is here. A link to summary of research is here.

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The NYT reports on how wealthy families are navigating the new estate tax laws.

Samuel V. Petrucci, director at Credit Suisse Private Bank, said he was working with an investment banker worth $75 million who was hesitant to put securities or cash into a trust for his children. Instead, he and his wife have decided to put a vacation home worth about $9 million into a trust that allows them to use the home until it passes on to their children.

“This client 100 percent understands why they should give $10 million,” Mr. Petrucci said. “To go from $75 million to $65 million doesn’t work for him. But in his mind, he is willing to part with the vacation home that he wants to keep in the family for a very long time.”

It is true that this wealthy banker will be able to enjoy the house he’s gifted while a similar size trust of cash and stocks would yield him no interim material comfort. Still, the lesson here is that just like spending, giving also comes with its own unique psychological features.


On our twitter feed, we asked if there are any behavioral economic concepts that have changed your perspective on your decision making. Here is one example that comes to mind.

The concept of mental accounting says that people perceive and code different events as they make different decisions. A well-known scenario involves a calculator and a laptop computer. Consider a calculator that sells for $50 at store A. Ask yourself how far you’d be willing to walk (in order to exclude issues about gas costs) to get that same calculator for $20 less at store B. Say it’s 20 minutes. Now, you are also in the market for a laptop computer. You are looking at a model that costs $1,250. Would you walk 20 minutes if you knew a store that sold it for $1,230? Many so no. $20 on a $50 purchase is significant (40 percent), but $20 on a $1,250 purchase is peanuts (1.6 percent). But, hey, saving $20 is saving $20, regardless of how big a ticket the item is.

If you think this way all the time about big and small purchases, eventually you’ll have changed your perspective.

So how has a behavioral economics concept affected your perspective?


An entire King of Queens episode devoted to behavioral finance and economics. Doug gets a Christmas bonus. He and Carrie decide not to spend their windfall (mental accounting). Doug wants to put it in the bank, while Carrie pushes for a high-flying internet stock (herd behavior). The stock goes up for one day, but quickly falls. They don’t sell because it’s too painful. They hold out, hoping the stock will recover (loss aversion). The stock continues to fall and they finally sell at the bottom. Then they notice news about government approval, the stock rallies, and they buy back in (availability bias). It’s all wrapped up in a syrupy sitcom message about the meaning of Christmas.

Hat tip: Rodrigo Sanchez.

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Jonah Lehrer says that he (and other people) pay for expensive bowls of cereal and high-speed internet in hotels because of mental accounting.

In the end, expensive hotels are able to charge insane amounts of money for Cheerios and wifi because these exorbitant charges get posted to the mental account of the hotel bill, which will be hundreds of dollars anyways. As a result, the charges don’t seem quite so crazy. (This also helps explain why cheap hotels are so much more likely to offer free internet and breakfast buffets. Sometimes, we get more when we pay less.)

If the exorbitant room rate makes the Cheerios palatable, perhaps sports team owners should raise ticket prices even more than they are accustomed to doing now. After all, the difference between a big city room and a bowl of bran is still larger than the difference between upper deck seats and hot dogs at most ball games.

Sporting events, hotel bills, flights – what are other mental accounts that affect your purchasing decisions?


After a report that just 1 in 10 people realized they got a tax cut last year, we’re wondering how many people will notice the new payroll tax cut this year? The Boston Globe asked a few Bostonians.

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The bonuses are smaller–even $0!–but the regular paychecks are bigger.

Even though employees will receive roughly the same amount of money, the psychological blow of not getting a bonus is substantial, especially in a Wall Street culture that has long equated success and prestige with bonus size. So there are sure to be plenty of long faces on employees across the financial sector who have come to expect a bonus on top of their base pay. Wall Streeters typically find out what their bonuses will be in January, with the payout coming in February.

One executive, whose firm prohibited discussing the topic with the news media, said the bump in base salaries had confused people, even though their overall compensation was the same. “People expect a big bonus,” this person said. “It is as if they don’t even see their base doubled last year.”


The Fed says the inflation rate over the last year is 1.2 percent, but a survey says consumers think it’s at 3 percent. The WSJ looks at people’s mental accounting of inflation. Some highlights.

  • “(People) pay more attention to the prices of things they buy frequently, or to prices that fluctuate a lot, such as gasoline and meat. In a Bank of England survey, consumers identified household energy, gasoline, transportation, food and drink as the top influences on their perception of inflation. In the U.S. last year, prices rose sharply in all of those categories, with the exception of food and drink.”
  • “A recent paper in the Journal of Consumer Affairs suggests that inflation expectations tend to be higher among people who are older, poorer or less-educated. A study by Cleveland Fed economists found inflation perceptions to be about 50% higher among women than men.”
  • “Outside of housing, middle-income consumers have experienced more inflation than other income groups over the past year, in part because they devote a relatively large share of their budget to energy and transportation. For the year ended in October, prices on the items consumed by the average middle-income household rose 2.1%, compared with only 1.8% for households with income of $150,000 or more, according to a Wall Street Journal analysis of Labor Department data.”
  • “Geography matters, too. Prices in western U.S. states rose only 0.6% in the year ended in October, compared with 1.5% in the Northeast and Midwest.”

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1) Richard Thaler on the mental accounting behind a devilish rebate card.

2) Dan Goldstein on the taxonomy of defaults.

3) It takes an average of 66 days to form an (easy) everyday habit.

4) The New Yorker reviews procrastination. A book about it, anyway.

5) Does prospect theory kill the taxpayer receipt idea?

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