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Pennsylvania Convention Center, 204-C
Hosted By:
American Economic Association
Mental Accounting
Paper Session
Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM
- Chair: Devin Pope, University of Chicago
Mental Budgeting vs. Relative Thinking
Abstract
In many situations, mental budgeting and relative thinking predict results that are in opposing directions. We study a situation of this type and provide evidence for when the predictions of one model will dominate the other.Extending the Consequences of Realization and Mental Accounting to the Domain of Social Preferences
Abstract
Previous research has shown that realization – when money or another medium of value transfers accounts – has significant implications for mental accounting. In the domain of risk, Imas (2016) showed that realization is a critical factor in determining how people respond to prior losses. When evaluating a prospective risky choice, a prior loss that is not realized – a paper loss – is evaluated jointly with the prospect in the same mental account. On the other hand, a realized loss closes the mental account of prior outcomes. Mental accounting and cumulative prospect theory predict that realizing a loss should then lead to less risk taking while not realizing a loss should lead to more, which is supported by the data. In this paper, we explore the consequences of realization and mental accounting in the domain of social preferences. Prior work has demonstrated fundamental differences in the ways in which people treat the earnings of others relative to their own. While individuals respond positively to an increase in stakes when the outcomes correspond to their own earnings, they are insensitive to the same changes in stakes when the outcomes correspond to earnings for others (Imas, 2014). We argue and demonstrate that the manner in which earnings for others are realized affects which mental accounts they are associated with. This determines both the amount people are willing to sacrifice for others, and their sensitivity to the impact of those sacrifices. People can appear both selfish and altruistic, and be just as sensitive to the size of the stakes for others as for themselves, depending on the extent of realization involved.Discussant(s)
Brigitte Madrian
,
Harvard University
John Beshears
,
Harvard Business School
Christine Exley
,
Harvard Business School
JEL Classifications
- I1 - Health