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How do people perform mental accounting operations?

There are various rules and conventions used in ordinary accounting for many years. However, no corresponding source of rules or conventions for mental accounting can be tracked, so that observation became the only way to learn about that.

There are three components of mental accounting mostly people will concern about. First, capture of perceived outcomes and evaluation of decision making. Second, distribution of activities from varies accounts to specific one. Third, frequency of accounts evaluated.

Decision making for mental accounting

1.	Transaction utility

Generally, consumers will acquire two types of utility—acquisition utility and transaction utility— through purchase. Acquisition utility measures the value of the commodities obtained compared to their price, which is analogous to the ‘consumer surplus’ in economic terms. Theoretically, acquisition utility is evaluated by using the perceived value on obtaining a commodity that will be seen as receiving a present by consumers, less the amount paid. On the other hand, transaction utility determines the perceived value of a `transaction' which is calculated as the difference between the prices paid and the `quote price' for the commodity, in other words, it is the expected price that the consumer will pay for.

2.	Opening and closing accounts

One important element of decision making is to determine when to keep the account open and when to close that. There are many evidences shows that mental accounting suggests the recognized gain or loss have a bigger influence on people’s feeling than conceptual gain or loss. Therefore, in regarding to close an account, people under mental accounting would close the account which is better than the other because closing of the other would more painful. Moreover, since closing accounts at loss will be discouraging, mental accounting also predits that people will be unwilling to close accounts under the condition of loss.

3.	Advance purchases, sunk costs, and payment depreciation

Another situation relating to make decision of when to open and close an account is when the purchase is better of compared with the consumptions during that period. When evaluating a transaction, normally, when the account is closed there is no ex-post purchasing evaluation. Thus the evaluation is more likely to be done as the increase of transaction size or the increase of uncommon purchase. Regarding to the influence on decision making from sunk costs, there are several arguments. First, the more money spent on the commodity, more frequently the consumer will use them. Second, even though the consumer stops using the commodity that they paid much money for, they will still keep them. That is the more money spent on the commodity, the longer time the consumer will keep them. Third, regardless how much they spend on the commodity, it will be fully depreciated before the consumer casts off them eventually. However, although theoretically sunk cost may have influence on decision making, people always ignore sunk cost in their daily life.

4.	Payment decoupling

Mental accounting predicts that consumer will “get benefit” from prepayment as the prepayment will decouple the perceived cost from purchasing a commodity. For example, credit card and flat-rate service. Credit card decouples the cost mainly for 2 reasons. First, it defers the payment by several weeks, which makes actual payment becomes later than the purchase also separate from the purchase. Second, once the bill arrives, the purchase will mixed in the context of other bills. On the other hand, flat-rate service decouples the payment in a different way. After making a prepayment for flat-rate service, the consumer will see the cost of usage from the service being zero.

Implication on marketing
Compounding Rule Implications: compounding rule implications illustrate how the results from the analysis of mental arithmetic can influence marketing decisions either in the design or products or in the choice of how products are described.The results can be summarized by two principles: segregate gains and integrate losses. (1)Segregate Gains: The basic principle of segregating gains is simple and needs little elaboration or illustration. When a seller has a product with more than one dimension it is desirable to have each dimension evaluated separately. The principle is used at two levels. First, each of the items sold is said to have a multitude of uses, each of which is demonstrated. Second, several “bonus” items are included “if you call right now.”(2)Integrate Losses: When possible, consumers would prefer to integrate losses. The concavity of the loss function implies that adding $50 less to an existing $1,000 loss will have little impact if it is integrated. This means that sellers have a distinct advantage in selling something if its cost can be added on to another larger purchase.

Transaction Utility Implications: (1)Sellouts and Scalping: The theory stipulates that prices adjust over time until supply equals demand. While the confidence put in that analysis is generally well founded, there are some markets which consistently fail to clear. (2)Methods of Raising Price. A seller who has a monopoly over some popular product may find that the price being charged is substantially less than the market clearing price. The theory provides three kinds of strategies that can be tried. First, steps can be taken to increase the perceived reference price. A second general strategy is to increase the minimum purchase required and/or to tie the sale of the product to something else. The third strategy is to try to obscure p∗ and thus make the transaction disutility less salient. (3)Suggested Retail Price. Many manufacturers offer a “suggested retail price”(SRP) for their products. In the absence of fair trade laws, SRP s must be the only suggestions, but there are distinct differences across products in the relationship between market prices and SRPs. In some cases the SRP is usually equal to the market price. In other cases the SRP exceeds the market price by as much as 100% or more.

Budgeting Implications: The analysis of budgeting rules suggests that category and time specific shadow prices can vary. This implies that individuals fail to undertake some internal arbitrage operations that in principle could increase utility.

Factors of influencing the features of mental accounting
4. emotional reaction people will experience emotional reaction after realizing they've made an error in judgment. Faced with the prospect of selling a stock, investors become emotionally affected by the price at which they purchased the stock. So, consumer will be willing to keep the goods they avoid selling it as a way to avoid the regret of having made a bad investment, as well as the embarrassment of reporting a loss.

Prelec and Loewenstein (1998) propose that the customer will fell painful for the payment immediately after the purchase, which will reduce or will even offset the happiness produced from consumption. The aching feeling act a significant role relating to consumer’s self-control.

Decoupling of payment and consumption: Shafir and Thaler (1999) present that decoupling of payment can decrease the harmful impact on feeling painful from purchase, and increase the satisfaction and the probability of hedonic consumption. People will perceive a good purchased for free even though it is able to be traded in the market, this kind of perspective can make consumers become better-off by releasing them from excessively prudent.

Mental accounts and hedonic self-regulation: it is ambiguous for consumers between the term ‘economically losses’ and ‘psychologically gains’.

When purchasing goods, a consumer is more probably to redeem a certain-valued-coupon when the amount can be saved from purchasing any goods in that store instead of only saving the coupon value on specific goods, and the savings on the coupon will be perceived as extra income that people would prefer to spend on purchasing luxuries, as a gift given to themselves.

Consumers perceive the cash to be placed into a “general account” used for regular, essential expenditure and it is hard to correspond with luxurious expenditure. Thus, they tend to pre-designate that reward as a luxury. This prop up the view that mental accounting can help counteract the miserable feeling from consumption and a propensity to under-consume luxuries.