Special Session Summary Mental Accounting: Flexible Accounts, Order Effects and Incommensurable Entries

Joseph C. Nunes, University of Southern California
[ to cite ]:
Joseph C. Nunes (2001) ,"Special Session Summary Mental Accounting: Flexible Accounts, Order Effects and Incommensurable Entries", in NA - Advances in Consumer Research Volume 28, eds. Mary C. Gilly and Joan Meyers-Levy, Valdosta, GA : Association for Consumer Research, Pages: 70.

Advances in Consumer Research Volume 28, 2001     Page 70

SPECIAL SESSION SUMMARY

MENTAL ACCOUNTING: FLEXIBLE ACCOUNTS, ORDER EFFECTS AND INCOMMENSURABLE ENTRIES

Joseph C. Nunes, University of Southern California

This session explored some of the boundaries and limitations of Mental Accounting. Mental Accounting describes the cognitive processes utilized by individual decision-makers to keep track of their assets. This involves the perception of inputs and outcomes, the categorization of funds and the timing of how accounts are balanced (Thaler 1999).

The first paper by Dilip Soman and Amar Cheema, "Malleable Mental Accounting," (MMA) challenged some of the rules of Mental Accounting by incorporating motivational reasons for people’s behavior. Research in mental accounting assumes that consumers form and operate on mental accounts on the basis of a set of relatively unambiguous rules. However, the authors argued that if there is flexibility or ambiguity in accounting, consumers manipulate the accounts to justify whatever they want to do (either purchase or consumption decisions). More formally, their malleable mental accounting (MMA) hypothesis states: "Consumers will manipulate their mental accounts in order to justify choosing desirable options and reject undesirable ones in situations where there is flexibility." They provided evidence for the MMA hypothesis in four experiments with hypothetical and real choices. Their results and proposed theoretical framework joins the growing literature that speaks to the importance of motivation in consumer decision making. It also adds to the mental accounting literature by talking about factors that influence the formation and interpretation of mental accounts. MMA also explains the simultaneous self-control and temptation in the presence of commitment devices like spending categories.

The second paper by Haipeng (Allan) Chen Akshay R. Rao, "Close Encounters of Two Kinds," challenged certain predictions from Mental Accounting and Prospect Theory regarding the evaluation of neutral outcomes, based on the order of outcomes. According to prospect theory’s value function, a loss always looms larger than a gain. Following this principle, the combined utility of a loss and an equivalent gain is negative if they are segregated and the utility is zero if they are integrated (Kahneman & Tversky 1979; Thaler 1985). The authors predicted, however, that the order of the two events matters: a negative event followed by an equivalent positive event makes people happier and a positive event followed by an equivalent negative even makes people less happy, compared with a zero outcome. The authors posit that this order effect is caused by an imperfect shift of the reference point after the first event occurs. In a series of studies they demonstrated this order effect for absolute and relative framing (Heath et al. 1995), for both large and small outcomes, and in monetary as well as academic and social situations (Linville and Fischer 1991). They also demonstrated in a separate study that this order effect is due to an imperfect movement of the reference point. A final study demonstrated the marketing implications.

Finally, the third paper by Joseph C. Nunes and C.W. Park, on "Non-Cash Incentives," explores how the "rules" of mental accounting apply, or don’t apply, when transactions include non-monetary factors. Changes in monetary magnitude often are based not on their absolute level, but rather on their deviation from some reference level, or "frame." The pricing literature is replete with research focusing on how consumers respond to changes in price (i.e., sales), when both the reference level and change are expressed in monetary measures. Often times, however, a promotion is presented in non-monetary terms (e.g., a premium). This research demonstrated how people do not exhibit the same diminishing sensitivity to additional costs or benefits when they are accrued in a currency other than the referent currency (e.g., receive a free razor with a can of shaving cream versus receiving 20% more shaving cream free). The results suggest that it is more difficult for the individual to transform the value of benefits provided in different currencies onto the same value function. Consequently, the benefit or marginal value of a non-monetary premium may not be evaluated in relation to the same reference point as the focal product (i.e., relativistic processing); hence its value is less likely than a "sale" (e.g., $5 off a $45 item) to be diminished as an incremental gain. The results contribute to a richer understanding of how and when certain "rules" of mental accounting apply and help explain how managers might benefit from the strategic use of non-monetary promotions and free add-ons rather than "more of the same" for free.

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