Mental Budgeting and Consumer Decisions

Consumers’ Mental Representation of Expenditures: Implications for Spending and Saving Decisions

People’s mental representation of expenditures is crucial to how they budget. We propose that much like how people represent natural kinds (e.g., animals and pl

Malleable Mental Accounting: The Effect of Flexibility on the Justification of Attractive Spending and Consumption Decisions

Mental accounts are often characterized as self‐control devices that consumers employ to prevent excess spending and consumption. However, under certain conditions of ambiguity, the mental accounting process is malleable; that is, consumers have flexibility in assigning expenses to different mental accounts. We demonstrate how consumers flexibly classify expenses, or construct accounts, to justify spending. An expense that can be assigned to more than one account (i.e., an ambiguous expense) is more likely to be incurred than an unambiguous expense that is constrained either by existing budgets or by previously constructed accounts. We explore the justification processes that underlie these results and their implications for mental accounts as self‐control devices.

Perspectives on mental accounting: An exploration of budgeting and investing

This article provides an overview of recent advances in the literature on mental accounting within the context of consumer financial decision‐making. We first discuss the categorization process that underlies mental accounting and the methods people use to categorize funds. We then highlight some of the notable work that examines how mental accounting influences budgeting, spending, and investment decisions. The article concludes by proposing an agenda for future research, focusing on current gaps in our knowledge and promising areas to explore.

The Exception Is the Rule: Underestimating and Overspending on Exceptional Expenses

Abstract Purchases fall along a continuum from ordinary (common or frequent) to exceptional (unusual or infrequent), with many of the largest expenses (e.g., electronics, celebrations) being the most exceptional. Across seven studies, we show that, while people are fairly adept at budgeting and predicting how much they will spend on ordinary items, they both underestimate their spending on exceptional purchases overall and overspend on each individual purchase. Based on the principles of mental accounting and choice bracketing, we show that this discrepancy arises in part because consumers categorize exceptional expenses too narrowly, construing each as a unique occurrence and consequently overspending across a series of discretely exceptional expenses. We conclude by proposing an intervention that diminishes this tendency by helping consumers consider their spending on exceptional items as part of a larger set of purchases.

Mental Accounting and Consumer Choice

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.

A Structural Model of Mental Accounting

We construct and estimate a formal economic model of mental accounting where utility maximizing consumers facing rationality constraints infrequently update the

Managing Mental Accounts: Payment Cards and Consumption Expenditures

Abstract 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.

Effects of mental accounting on purchase decision processes: A systematic review and research agenda

Abstract This paper aims to systematically analyze and synthesize the existing research published on mental accounting and purchase decision processes by conducting a systematic literature review. Specifically, the paper aims to answer the question: “What are the effects of mental accounting on purchase decision processes?” Therefore, it identified 110 papers which contribute to achieving the research objective and which were selected using the same data collection, data analysis, and quality standards. After reviewing the identified publications, the paper finds that the existing literature can be structured along four main themes impacting purchase decision‐making processes: (1) source of funds, (2) intended use of funds, (3) pricing, and (4) payments. The paper shows that for each of the four themes there are multiple mental accounting effects with an impact on for example willingness to pay, the experienced pain of paying or the ultimate purchase decision. Further, the paper identifies potential directions for future research in mental accounting, including the influence of product categories on mental accounting, flexibility in budget setting and its impact on mental accounting behavior, long‐term effects of mental budgeting on financial wealth, integration–segregation behavior in the context of pricing, the role of consumer characteristics on mental accounting behavior, and the impact of increased financial transparency through technology on mental accounting.

Managing Mental Accounts: Payment Cards and Consumption Expenditures

Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously received a new credit 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.

Consumers’ Mental Representation of Expenditures: Implications for Spending and Savings Decisions

Abstract People’s mental representation of expenditures is crucial to their budgeting. This article proposes that much like how they represent natural kinds (e.g., animals and plants), people represent expenditures in a hierarchical taxonomy. Seven studies, supported by six norming studies and three pilots, revealed that expenditures are represented hierarchically. We first recover people’s mental representations using a successive pile-sort method that asks people to form hierarchies of categories with common expenditures (e.g., rent, dining out, etc.). The pile-sort reveals consensus in people’s representations of expenditures and that these representations are relatively stable over time. Further, people’s adjustment in their spending behavior can be predicted by the distance between items in their representation. Specifically, when people overspent on an item, they spontaneously adjust spending more on taxonomically closer items. We examine this spontaneous adjustment behavior using both laboratory studies and field data with 6.5 million grocery shopping trips over 12 years. The findings highlight the connection between mental representation and consumer behavior, and they emphasize the importance of studying concepts and categories in the context of consumption.

In-Store Spending Dynamics: How Budgets Invert Relative-Spending Patterns

Abstract The authors conduct four controlled lab experiments and one field study in a brick-and-mortar grocery store to demonstrate that relative spending—the price of the purchased item relative to the mean price of the product category—evolves nonlinearly and distinctly for budget and nonbudget shoppers. While the relative spending of budget shoppers evolves in a concave manner, the relative spending of nonbudget shoppers evolves inversely in a convex manner. Thus, budget (nonbudget) shoppers spend relatively more (less) in the middle than at the beginning and toward the end of their shopping trip. Mediation analyses confirm that the pain of paying experienced while shopping drives price salience, which then drives relative spending. Moreover, manipulating shoppers’ pain of paying, by altering the opportunity costs associated with their spending or drawing shoppers’ attention to their spending via real-time spending feedback, is shown to influence these spending patterns. The research offers theoretical contributions to the in-store decision-making, budgeting, and pain-of-paying literature and has important implications for marketing and promotion strategies in retail and mobile technology environments, as it suggests when a shopper may be more sensitive to price-related factors.

On the Mental Accounting of Restricted-Use Funds: How Gift Cards Change What People Purchase

Abstract. This article emphasizes the role of categorization in mental accounting and proposes that once a mental account is established, purchases that ar

Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments

Abstract. Past expenses have been shown to influence future spending behavior by depleting available budgets. However, a prerequisite for this relationship

Consumer Financial Decision Making: Where We’ve Been and Where We’re Going

When making purchasing decisions, consumers consider their available budget and determine what payment method they will use as well as how they will finance the purchase. Consumers must also plan for long-term consumption by considering short- and long-term savings objectives, taking into account how they will invest money saved, as well as how they will borrow needed money and repay outstanding loans. This issue of the Journal of Association of Consumer Research explores financial decision making, which we define as the accumulation and use of resources across time, as reflected by consumers’ behavior and choices.

A Model of Mental Accounting and Reference Price Adaptation

Consumers possess a mental account that stores the worth of items purchased and yet to be consumed. Reference prices act as the book values of these items. Movements in the account—the comparison between the reference price and the price paid at entry, and the comparison between the benefit of consumption and the reference price at exit—yield hedonic benefits. The reference price is determined by a psychological process of adaptation to the price evoked by the trade. The model is integrative in that it explains a wide array of observed anomalies such as sunk-cost effects, payment depreciation, reluctance to trade, preference for prepayment, and the flat-rate bias. The model also generates new testable implications. This paper was accepted by James Smith, decision analysis.

The Effects of Prior Spending on Future Spending Decisions: The Role of Acquisition Liabilities and Payments

Research in mental accounting shows that prior spending influences a consumer's decision to make a new spending decision (Heath and Soll 1996, Soman 2001). In particular, greater spending in a particular category reduces the likelihood of further spending in that category. In the present research, we decompose “spending” into two distinct episodes—the acquisition liability episode during which a purchase is made accompanied by a commitment to pay (e.g., using a credit card) and the payment episode during which the consumer's wealth actually gets depleted (e.g., paying the credit card bill). Using a controlled laboratory experiment and real world data from a group of consumers, we replicate earlier findings that prior spending influences a pending spending decision, but also show that the location of both the acquisition liability episode and the payment episode play a role. Our results contribute to an understanding of the dynamic mental accounting of acquisition liability and actual outflows.