Expected value and consumer choices
| Subject: | 💰 Economics |
| Type: | Analytical Essay |
| Pages: | 4 |
| Word count: | 978 |
| Topics: | 🛒 Consumerism, Business Ethics, Marketing, 💸 Accounting |
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Table of Contents
Introduction
Subtle discrepancies emerging from cognitive accounting tend to target the choices of consumers. It is important for customers to have knowledge on when and how they become targeted by the discrepancies in a bid to enhance their decision-making process. This paper seeks to respond to questions about expected value and consumer choices that experience several challenging factors.
Response to Question 1: The Concept of Mental Accounting and its Impact on Customer’s Decision Making
According to Baghi, Rubaltelli, and Tedeschi (2010 p12), “Mental accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account.” In other words, the concept refers to how individuals quantify and categorize economic outcomes. The context of the concept can be described in a case where an asset group assigns different functions to individuals. Mental accounting has a detrimental and irrational effect on the behaviors and consumption decisions of the customers. For instance, as per the concept, the money used to pay down a debt is treated differently from the money in the special fund used by the same person. This is done with the ignorance of the fact that diversion of both the monies reduces one’s net worth and increases interest payments. Additionally, the evaluation of utility varies following the usage of the mental account. This means that there are changes in the perception of value at a different time (Soman & Ahn, 2011).
Response to Question 2: How Firms Take Advantage of the Mental Accounting of Consumers
Mental accounting engages the mind or thoughts of consumers who are influenced to treat money differently, especially when it derived from different sources (Soman & Ahn, 2011). An example that illustrates how a firm can take advantage of the consumer’s mental accounting involves a worker who has earned 500 dollars in a month. The employee is not willing to use the money to buy a music system, which he has always wished to buy. But he happens to receive 500 dollars as a reward from a promotion company following his attempt to win a rotary ticket. The worker is willing to part way with the reward. However, the cost of the music system he wishes to buy remains the same and he considers the efforts required to procure the 500 dollars. The business selling music systems will set a ‘bait’ for the worker by displaying a high-quality music system that is not actually in stock. The business can end up ‘switching’ the worker to a low-quality music system that is available in stock.
Response to Question 3: Benefiting from the Disparities Emerging from Mental Accounting
Hastings and Shapiro (2012) noted that it is vital to have specific goals for the various accounts familiar to investors. For instance, a person can set aside an account for an emergency reserve, another for college savings, and another for saving for retirement. This is the first way one can benefit from mental accounting. One of the advantages of cognitive accounting is that it encourages a person to think about his accounts and the efforts he is applying to achieve the objectives set for the accounts. To avoid the disparities that come along with mental accounting, an individual can consolidate accounts that have the same objective or goal like retirement (Choi, Laibson, & Madrian, 2009). An investor can have multiple accounts for retirement due to changes in job situations. It is difficult to manage and monitor the accounts holistically. An investor can consolidate the accounts to avoid the disparities associated with mental accounting. It is through this way that a person will have avoided the challenges posed by inequalities of mental accounting.
From a marketer’s point of view, a consumer can also avoid the pitfalls of disparities laid by firms by maintaining one critical shopping rule in mind. The rule should determine whether the customer is actually in need of the product or not at a particular time. A consumer should also be guided by rule in determining whether he or she is purchasing the product to stock or not. Another way to avoid cognitive accounting disparities is by treating all the money, whether received as a reward, gift, or salary, as the same. It is critical to treat all the money equal irrespective of their different sources (Hastings & Shapiro, 2012). An example to illustrate this is that of a gambling company which mostly take advantage of its consumers’ mental accounting. Once a consumer has secured some amount from the company by winning, he or she is always at a dilemma to continue to bet in a bid to get more. The consumer tends to forget that the money at hand is equal to one he/she has earned from income. If the consumer ends up treating the gambling different from other monies sourced from a different place and goes to bet all the won money, then he/she will experience the money accounting disparities. He/she can lose all the money and remain at loss.
Conclusion
From the analysis of the responses, it is evident that customer choices are affected by many factors, including money accounting. However, the consumer can decide the fate of his decision because money accounting can be used to an advantage or a disadvantage.
- Baghi, I., Rubaltelli, E., & Tedeschi, M. (2010). Mental accounting and cause-related marketing strategies. International Review on Public and Nonprofit Marketing, 7(2), 145-156.
- Choi, J. J., Laibson, D., & Madrian, B. C. (2009). Mental accounting in portfolio choice: Evidence from a flypaper effect. The American economic review, 99(5), 2085-2095.
- Hastings, J., & Shapiro, J. M. (2012). Mental accounting and consumer choice: evidence from commodity price shocks (No. w18248). National Bureau of Economic Research.
- Soman, D., & Ahn, H. K. (2011). Mental accounting and individual welfare. Perspectives on framing, 65-92.
Offered for reference purposes only.