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

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.

Double Mental Discounting: When a Single Price Promotion Feels Twice as Nice

This research finds that when a single gain has strong associations with multiple costs, consumers often mentally deduct that gain from perceived costs multiple times. For example, with some price promotions (e.g., spend $200 now and receive a $50 gift card to spend in the future), consumers mentally deduct the value of the price promotion from the cost of the first purchase when they receive the promotion, as well as from the cost of the second purchase when they use the promotion. Multiple mental deductions based on a single gain result in consumers' perceptions that their costs are lower than they actually are, which can trigger higher expenditures. This mental accounting phenomenon, referred to as “double mental discounting,” is driven by the extent to which gains feel associated, or coupled, with multiple purchases. This article also documents methods to decouple promotional gains from purchases, thus mitigating double mental discounting.

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.

Mental Budgeting and Consumer Decisions

Abstract. Consumers often set budgets for categories of expenses (e.g., entertainment) and track expenses against their budget. Because budgets cannot perf

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.

Mental accounting of product returns

Abstract Product returns incur a substantial financial loss for retailers. We demonstrate how, when, and why cross‐selling during the product returns process can reduce this loss in revenue. We find consumers more readily spend money refunded from product returns than unspent money. We theorize that this refund effect occurs because consumers psychologically realize the loss of money when purchasing products and earmark that money for spending. Thus, consumers feel a smaller psychological loss when spending refunded money than unspent money on a subsequent purchase. In six experiments, we find consumers spend refunded money more freely than unspent money, even more than windfall gains like lottery winnings, on products in similar and different product categories (e.g., groceries vs. apparel). However, the refund effect only holds when consumers do not expect to return products at the point of purchase and before refunded money is commingled with money in other accounts. Our findings identify a new fungibility violation due to mental accounting (i.e., a new source effect), and illustrate its value for generating, validating, and explaining revenue retention strategies.

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.

Gift Cards and Mental Accounting: Green‐lighting Hedonic Spending

ABSTRACT In three studies, we examine the mental accounting rules that govern how gift cards are used. We predicted that their identity as gift cards would shift consumption from utilitarian to hedonic goods even in contexts where both types of goods are available and the consumer's needs are unchanged. In Study 1a, participants were asked to imagine that they had both a gift card and a specified amount of cash and needed to purchase both a hedonic item and a utilitarian item. When asked which currency they would use to buy which item, respondents were significantly more likely to say they would use the gift card to buy the hedonic item. Study 1b replicated this result and found that it was tied to participants' beliefs how different types of money should be used. In Study 2, we found that participants who were required to spend a certain amount of their compensation in a laboratory store spent more on hedonic goods if their payment was in the form of a gift card. In Study 3, we analyzed transactions at a campus bookstore and found that shoppers tended to spend disproportionately on hedonic goods when using their gift cards than when making credit card purchases. Taken together, these studies indicate that people tend to assign the monetary value of a gift card to a hedonic mental account and spend it accordingly. Copyright © 2014 John Wiley & Sons, Ltd.

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.

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.

Context-Dependent Drivers of Discretionary Debt Decisions: Explaining Willingness to Borrow for Experiential Purchases

Abstract Mental accounting research suggests that consumers prefer borrowing for longer-lasting purchases in order to receive benefits from the purchases as they pay for them. In contrast, two sets of archival data and five lab studies show that consumers are more willing to borrow for experiential versus material purchases, even though experiential purchases tend to have a shorter physical duration. Further, framing the same purchase as more experiential than material increases willingness to borrow. This effect occurs because purchase timing is more important for experiential purchases—a function of consumers’ aversion to missing out on planned consumption. Thus, we moderate the proposed effect by varying whether the borrowing decision impacts planned consumption. Other differences between material and experiential purchases, such as scarcity or expected happiness, cannot similarly explain our results. Moreover, our conceptualization allows us to reconcile the apparent contradiction between the previous and current research by examining the relative impact of purchase-timing importance and payment-benefit duration matching in different contexts (i.e., “purchasing” and “source-of-funding” decisions).

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

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.

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.

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 Red and the Black: Mental Accounting of Savings and Debt

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.