Mental accounting also referred to as psychological accounting, refers to mental categories and values people associate with money, be it losses or expenses. This behavioural economics aspect points out that people may not always be logical about their expense and investment decisions because they view money in different categories, with some categories given more prominence than others.
For example, a man is about to purchase ice cream for USD 5. But he notices that he is missing USD 5 when he checks his wallet. He will go ahead and get the ice cream thinking he must have lost the money or misplaced because there’s nothing he can do about it now. After he’s purchased it, he drops it while walking. Would he buy second ice cream?
As per traditional economic concepts, and probably logic when we think of it, he would go back and get the second ice cream. However, research has proven that most people (approximately 88%) buy when they think their money is lost, and only a much lesser set of people (46% only) purchase a second time to replace the first.
Do Westerners and Easterners treat mental accounting differently?
This question arises because most of the studies into mental accounting are done with western participants whose thinking style varies from that of easterners. While westerners have an analytical approach to thinking and analysis, easterners are holistic in their thought process.
The analytical approach of westerners makes them ignore the context associated with an object and focus only on the attributes of the object. Based on attributes, it is assigned to a category, which forms the basis for explanations and predictions.
Easteners have a holistic outlook towards categorising. They look at the context, on the whole, factoring in the relationship between objects before forming conclusions and associations.
Fundamentally, westerners are more mindful of formal rules when they make associations, and by extension categorisations, which sets apart their thinking style from the easterners
For example, research indicates that there is a distinct difference between categorisations done by American children when compared to Chinese children. American children categorise on the basis of rules, whereas Chinese children categorise on the basis of relationships in context. For example, when asked to form groups between male, female and child, American children would probably group male and female together, categorising them as adults. Whereas, Chinese children would group female and child together, indicating their priority for relationships.
Practical implications of mental accounting
People tend to purchase more with credit cards because the payment is prolonged to a later date. At the time of payment, a USD 5 increase in price may not be welcomed if the payment is via cash. But if it’s a credit card payment, the customer thinks of it as greater value obtained at the time of purchase.
Marketers should be mindful of mental accounting to maximize value for potential customers. It would be helpful to compel customers to group according to marketer’s target categories for favourable outcomes.
Policy makers should ideally understand how people compartmentalise information and arrive at choices to implement better policies for the welfare, wealth and health of the public.