MENTAL ACCOUNTING

10 important questions on MENTAL ACCOUNTING

Framing outcomes: what is minimal account?

– Examining only differences between two options, disregarding all other features

Framing outcomes: what is topical account?

– Relates consequences of possible choices to reference level determined by context within which decision arises

Framing outcomes: what is Comprehensive account

– Incorporates all other factors including current wealth, future earnings, possible outcomes of other probabilistic holdings, etc.
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Hedonic editing: How does someone wish to frame receipt of multiple outcomes?

• Segregate gains
• Integrate losses
• Integrate smaller losses with larger gains
• Segregate small gains from larger losses

What is Mental accounting decision making?

– How outcomes are perceived and experienced
– How decisions are made and then evaluated

What is Choice bracketing and dynamic mental accounting?

– Frequency with which accounts are evaluated
– Accounts balanced daily-weekly-yearly… Accounts narrowly/broadly defined (“bracket”)

What is the Acquisition utility?

measure of the value of the good obtained relative to its price (cf. economic surplus) = value (receiving good as gift) - price paid

What is Transaction utility?

perceived value of the “deal” = price paid – reference price

What is the DISPOSITION EFFECT?

Investors are predisposed to holding losers too long and selling winners too early

– As people dislike incurring losses much more than they enjoy making gains, and people are willing to gamble in the domain of losses, investors will hold onto stocks that have lost value and will be eager to sell stocks that have risen in value

What is the sunk cost effect?

Effect arises when a decision is referred to an existing account in which the current balance is negative

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