Business Case Studies & Business Publications

Consumers' Mental Accounting

Baucells, Manel

Technical Note

Consumers' Mental Accounting

Baucells, Manel

QA-0908 | Published December 17, 2018 | 6 pages Technical Note

Collection: Darden School of Business

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When a consumer purchases an item, the presumption is that the benefit obtained from it exceeds the price paid—we can think of this difference as the consumer profit. How do consumers calculate this profit, especially when they do not immediately consume the purchased item? This technical note presents a model of mental accounting that gives insights into the process that consumers follow to calculate value. It compares rational logic, accounting logic, and mental accounting logic, incorporating the phenomena of loss aversion, transaction utility, and consumer anomalies. This note is used at Darden in the second-year “Behavioral Decision Making” course. It would also be suitable in courses covering rational decision-making in business.

Introduce the concept of reference price comparison and reference price adaptation. Introduce the process of mental accounting, with the operations of mental banking of purchased units and mental amortization of consumed units. Discuss the sunk cost effect, the rip-off effect, the flat-rate bias, the feeling of free consumption, and the tendency to hoard.