Mental Accounting and Buyer Behavior
WHAT IS MENTAL ACCOUNTING?
Mental accounting questions the microeconomic principle of fungibility of money. As per the microeconomic theory, money does not have labels attached to it, therefore money may be used seamlessly across all the purchases. But in reality, people in their minds allocate money into separate accounts such as "entertainment", "food", etc.
THE MENTAL ACCOUNTING CONCEPT
It is a model developed on mental coding based on combinations of gains and losses perceived by the customers using the prospect theory value function. People tend to behave in a pattern to minimize loss: so called "loss aversion". We can distinguish 4 joint outcomes (x, y) to be considered and the proposed advice/strategy in such case for marketers is as follows:
- MULTIPLE GAINS: Segregate gains, because consumers perceive separate gains to be more than the overall gain according to the value function of prospect theory. For example it is better to show gains of $20 and $30 separately rather than showing one gain of $50.
- MULTIPLE LOSSES: Integrate losses. If a consumer is facing multiple losses then we must not tell them the losses separately, rather we should combine the value of losses and tell them such that the perceived value of the loss is lesser. E. G.If there are losses of $10, $20, $40 them rather than telling that there are these three losses, we must tell that there is a loss of $70.
- MIXED GAINS: Cancel losses against larger gains. In this case, if the gain is more and loss is less then we should cancel the losses from the gains and tell the final gain to the consumer such that he/she feels that loss has not happened. For example if there is a gain of $100 and a loss of $20 then you must tell the consumer that there is a gain of $80 rather than telling the separate incidences.
- MIXED LOSSES: Segregate silver linings. In the case of a huge loss and small gains, show the gains separately. For example if the loss is $100 and the gains are $20 and $10 then we must show the gains separately which creates a sense of lesser loss.
⇨ Is Mental Accounting a useful tool for marketers?
Richard Thaler, "Mental Accounting and Consumer Choice", Marketing Science, 1985, Month, Vol 4, pp. 199-214