Exam 2 Lecture 4

Question 1

money is fungible

Answer 1

• any two $5 bills are entirely equal and can equally be spent on any purchase
• however consumers don’t treat money this way

Question 2

how do consumers treat money?

Answer 2

they form mental accounts and assign certain money to certain accounts

Question 3

mental accounting

Answer 3

the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities

Question 4

minimal account

Answer 4

examining options by looking only at the differences btw them, disregarding any commonalities

Question 5

comprehensive account

Answer 5

incorporating all other factors and all available info like current wealth, future earnings, etc.

Question 6

topical account

Answer 6

relating the consequences of possible choices to a reference level that is determined by the context within which the decision arises

Question 7

which account is most commonly used?

Answer 7

topical accounts when making financial decisions

Question 8

minimal account water bottle jacket example

Answer 8

• only consider dif. btw. local options
• do I drive 20 min to save $7.50?
• answer is yes for both options

Question 9

comprehensive account water bottle jacket example

Answer 9

• consider all relevant info including wealth
• (wealth + water bottle +jacket -$165) vs. )wealth + water bottle + jacket - 20 min. +$7.50)
• the answer is the same for both probs.

Question 10

topical account water bottle jacket example

Answer 10

• considers the context in which the decision arises
• reducing the price of the water bottle from $15 to $7.50 vs. reducing the price of jacket from $150 to $142
• diminishing sensitivity

Question 11

choice bracketing

Answer 11

• how frequently accounts are evaluated and balanced

- what brackets do people use for decisions and choices?

Question 12

empirical finding

Answer 12

betting on long shots increases on the last race of the day why?
-the bettor is losing money on the day and anxious to break even

Question 13

wide bracketing

Answer 13

use a per-choice per consumption account

Question 14

narrow bracketing

Answer 14

use a per-house per bag/day account

Question 15

sunk cost effect

Answer 15

consumers continue to wait for losses to be recovered and/or continue investing money (or time) in losing ventures (throwing good money after bad)

Question 16

typicality

Answer 16

consumers are more likely to reduce consumption associated with a specific mental account after more (vs. less) typical purchases

• marsha can assign dinner/movie to food or entertainment accounts. she’ll assign it to food if she really wants to go to the comedy show
• greater advantage to retailer-typical items with retailer specific cards

Question 17

payment decoupling

Answer 17

consumption which has been previously paid for can be enjoyed as if it were free

Question 18

debt aversion

Answer 18

people generally prefer pre-payment for debts (purchases) and post-payment for work performed

Question 19

source of money

Answer 19

people spend money according to how they receive money

• money frivolousy earned is frivolously spent
• money found in a coat pocket is spend indulgently
• money from savings is spent carefully

Question 20

main takeaway from mental accounting

Answer 20

once consumers label money for a specific purpose, they find it very difficult to use it for other purposes

Question 21

mental accounts are not…

Answer 21

black and white. some expenditures fit certain accounts better than others