A concept first named by Richard Thaler (1980), mental accounting attempts to describe the process whereby people code, categorise and evaluate economic outcomes. Mental accounting theorists argue that people group their assets into a number of non-fungible mental accounts. One detailed application of mental accounting, the behavioural life cycle hypothesis (Shefrin & Thaler, 1988), posits that people mentally frame assets as belonging to either current income, current wealth or future income and this has implications for their behaviour as the accounts are largely non-fungible and marginal propensity to consume out of each account is different. Richard H. Thaler (b. ... Economics (deriving from the Greek words οίκω [okos], house, and νέμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ... It has been suggested that Accounting scholarship be merged into this article or section. ... Fungibility is the degree to which all instances of a given commodity are considered interchangeable. ... The marginal propensity to consume (MPC) refers to the increase in personal consumer spending (consumption) that occurs with an increase in disposable income (income after taxes and transfers). ...

In mental accounting theory, framing means that the way a person subjectively frames a transaction in their mind will determine the utility they receive or expect. This concept is similarly used in prospect theory, and many mental accounting theorists adopt that theory as the value function in their analyses. In economics, utility is a measure of the relative happiness or satisfaction (gratification) gained by consuming different bundles of goods and services. ... Prospect theory was developed by Daniel Kahneman and Amos Tversky in 1979 as a psychologically realistic alternative to expected utility theory. ...

Another very important concept used to understand mental accounting is that of modified utility function. There are 2 values attached to any transaction - acquisition value and transaction value. Acquisition value is the money that one is ready to part with for physically acquiring some good. Transaction value is the value one attaches to having a good deal. If the price that one is paying is equal to the mental reference price for the good, the transaction value is zero. If the price is lower than the reference price, the transaction utility is positive. In general, the economic value of something is how much a product or service is worth to someone relative to other things (often measured in money). ...

More generally, a mental accounting cost or mental transaction cost, a kind of transaction cost, is the cost of making a useful decision, especially of a consumer making a useful decision to buy, and may set a lower bound on useful price granularity in a market. In a software engineering context the latter phrase refers to the cost to the user of making a useful selection in the user interface, in contrast to a computational transaction cost such as CPU, memory, or network usage. In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. ...

The concept is not new. It's common among a trading community in southern part of India to say, the money that comes from selling a dog doesn't bark: "Nai viththa kaasu kuraikaadhu"

References

• Benartzi, S. and Thaler, R. H. "Myopic loss-aversion and the equity premium puzzle" (1995) Quarterly Journal of Economics, CX , 75-92.
• Kahneman, D., Knetsch, J.L., Thaler, R. H. "Experimental Tests of the Endowment Effect and the Coase Theorem" (1990) Journal of Political Economy, 98(6) , 1325-1348.
• Kahneman, D., Knetsch, J.L., Thaler, R. H. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias" (1991) Journal of Economic Perspectives, 5(1) , 193-206.
• Shefrin, H. H. and Thaler, R. H. "The behavioral life-cycle hypothesis" (1988) Economic Inquiry, 26 , 609-643.
• Thaler, R. H. "Towards a positive theory of consumer choice" (1980) Journal of Economic Behavior and Organization, 1, 39-60
• Thaler, R. H. "Mental accounting and consumer choice" (1985) Marketing Science, 4 , 199-214.
• Thaler, R. H. "Saving, fungibility and mental accounts" (1990) Journal of Economic Perspectives, 4 , 193-205.
• Thaler, R. H. "Mental accounting matters" (1999) Journal of Behavioral Decision Making, 12(3) , 183-206.

See also

• Micropayment
• Preference
• Psychological pricing
• Transaction cost

Micropayments are means for transferring money, in situations where collecting money with the usual payment systems is impractical, or very expensive, in terms of the amount of money being collected. ... Preference (or taste) is a concept, used in the social sciences, particularly economics. ... Retail prices are often expressed as odd prices: a little less than a round number, e. ... In economics and related disciplines, a transaction cost is a cost incurred in making an economic exchange. ...

External links

• The three main components of Mental Accounting.