Lecture 6: mental accounting and reason based choice

Question 1

opportunity costs

Answer 1

time and money should be taken into consideration when doing things. When you pay 100 euro’s for something you could have done a lot of other things with it.

prospect theory

not limited to money, also time for example

Question 2

Between jobs choice

Answer 2

if a manager offers you 1000 euro’s to work an hour how much do you expect him to pay you to work 2 hours. and why is this 2000 and not 1013 if your normal wage is 13 euro.
you shouldn’t compare it to the extreme offer, but to what you usually make.

Question 3

windful money

Answer 3

money you don’t expect to get.

different ways you get money can influence how you spend it

Question 4

mental accounting

Answer 4

we treat money differently dependent on how we get it. we sometimes hold sentimental value towards it, but we should just see it as a way to get something else.

Question 5

fungibility of money

Answer 5

any unit of money is substitutable for another.
a central assumption in the theory of consumer choice.

Question 6

topic thinking

Answer 6

we don’t mix money from certain topics.
to protect ourselves from losing the money.

Question 7

mental budgetting

Answer 7

having different accounts in our mind we keep seperate for different things. this is flexibal, but consequential

Question 8

three types of mental accounts within mental budgeting

Answer 8

• minimal account
• topical account
• comprehensive account

Question 9

minimal account

Answer 9

every decision you make is based on the elements of the decision

Question 10

topical account

Answer 10

you use the elements of the decision, but also the context. this is what we typically use

Question 11

comprehensive account

Answer 11

you take everything you have and make every decision related to what you have. This is how economic theory thinks about decision making

Question 12

hedonic editing

Answer 12

we do what makes us most happy. (we are a pleasure machine)

Question 13

mental accounting with two positive outcomes

Answer 13

seperate. first gaining 10 and then 5 doesn’t matter, but seperating the outcomes gives more marginal utility.

Question 14

mental accounting with two negative outcomes

Answer 14

integrating. first losing 10 euro’s and then 5 or just losing 15 doesn’t matter, but according to marginal utility integrating would be better.

Question 15

mental accounting with mixed outcomes

Answer 15

• mixed gain: integrate (winning the lottery and losing 80% is worse than just winning 20%)
• mixed losses depends
• if the losses are much larger than the gains segregating is a silver lining, if you have a small gain you segregate so you have a little thing that makes you happy
• if the losses are only a bit larger you integrate so it cancels out a little

Question 16

acquisition utility

Answer 16

value of a good relative to its price

Question 17

transaction utility

Answer 17

percieved value of the deal, is the price fair in relation to the reference price

Question 18

payment coupling

Answer 18

normally you buy something and consume it, so the two things are coupled, but sometimes that is not the case.

Question 19

Gourville & Soman

Answer 19

ski experiment where people could either pay 4X40 (coupled consumption) times a ski pass for four days or just 160 (decoupled consumption) euro’s all at once.
then on the 4th day there was a heavy snowstorm and the people that bought a 160 pass didn’t go, but the 4X40 felt like they payed for an extra day.

by decoupling costs from consumption the sunk cost fallacy can be overcome

Question 20

why do we use mental accounting if it isn’t rationally/economically beneficial?

Answer 20

self control. saving is difficult, but overspending is easy. deciding not to touch our savings even if that means we are in debt keeps us from spending our savings.
in a way this is rational behavior, because it helps us in the long run.

Question 21

Reason-based choice models

Answer 21

models based on how we usually talk about decisions. help us understand conflict and allows for comparative considerations. gives a more applicable model in contradiction to the value based models.

Question 22

choice between equally attractive options

Answer 22

people resolve the conflict by selecting the alternative that is more superior on the more important dimension, which seems to provide a compelling reason for choice.

Question 23

reasons pro and con, rejecting versus choosing

Answer 23

if positive features are weighed heavier when choosing than rejecting ans negative features are weighed heavier when rejecting than choosing, an enriched option could be both chosen and rejected when compared to an impoverished option.

Question 24

principle of procedure invariance

Answer 24

rational choice requires strategically equivalent methods of elicitation to yield identical preferences.

Question 25

the choose-reject discrepancy

Answer 25

the way things are presented influence our choices. represents failure of procedure invariance

Question 26

Choice under conflict

Answer 26

• seeking options: the need to choose creates conflict and we can resolve it by seeking additional options
• adding options: the supermarket adds options of balsamic vinegar.

Question 27

assymetric dominance

adding options

Answer 27

by giving another option an earlier option becomes more attractive because it is now better than one and equal to another options instead of equal to one.

Question 28

compromise effect

adding options

Answer 28

average option is better on aspects that other options performe poorly on. (and worse on aspects they excel in)

Question 29

disjunction effect

Answer 29

you get a reason to select one over another if you didn’t already know what to choose. sometimes we have reasons, but don’t know them yet if a third option is added.

Question 30

Shefir and Tversky on the disjunction effect

Answer 30

people would go on holiday with their friends if they passed their exams and if they didn’t, but wouldn’t go if the were not sure.
this is a violation of the sure-thing principle.

Question 31

discount ambigous information

Answer 31

combination of the disjunction effect and transaction decoupling.
ambiguity makes people rational, because they are irrational.
studied with scenario’s about sunk costs.

Question 32

evaluability hypothesis

Answer 32

in reason-based choice experiments we usually give people choices, but in real life there is usually an option that people evaluate individually.
studied with giving people an individual choice, and then two options. (dictionary study)