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TAL

ACCO

UNTI

NG

Tasdik Syed and David Hammel

Definitions

One unit or piece must be perceived as equivalent to any other and capable of mutual substitution

The system (sometimes implicit) that households use to evaluate, regulate, and process their home budget

Fungible Nature of Money Mental Accounting

http://ca.youtube.com/watch?v=d4FsBeLZhmk

Interview with Gene Hackman and Dustin Hoffman

Outcomes of Mental Accounting Potentially Harmful

Outcomes Gambling with “House

Money” and “Break-even” effects

Interest Rates & Consumer Behaviour

Potentially Beneficial Outcomes Saving for an objective

Gambling with House Money…

Thaler, Richard H.,and Eric J. Johnson. " Gambling with house money and trying to break even: the effects of prior outcome on risky choice" Management Science 36 (1990):643-60

House Money Effect People are more willing to gamble with

money they consider “house money” Increased risk

seeking in the presence of a prior gain.

Break-even Effect

In the presence of prior losses, outcomes which offer a chance to break even are especially attractive.

Examples

First Round$15

Second Round50:50

77% Participate

23% Do NotParticipate

Second Round50:50

$4.50

$15

Win

ner

Lose

r

Less likely to

Participate

More likely to

Participate

$4.50

Interest Rates & Consumer Behaviour

Gross, David B., and Nicholas S. Souleles. "Do Liquidity Contraints and Interest Rates Matter for Consumer Behaviour? Evidence from Credit Card Data." Quarterly Journal of Economics 117 (2002): 149-85

Interest Rates & Consumer Behaviour This paper utilizes a

unique data set of credit card accounts to analyze how people respond to credit supply.

Many credit card borrowers simultaneously hold low-yielding assets.

Behavior is puzzling & inconsistent with any conventional model.

Mental Accounting Paradox

Mentally divide money for different purposes, and tend to be reluctant to change our thinking, even when it is against our interests.

Assign different sources of money to different purposes, despite the fact that money is completely interchangeable.

Useful application of mental accounting: Put money away for

university tuition fees and student loans

Save a certain percentage of current income for future spending

However, be aware of the paradox

Thank you