Expected Value and Consumer Choices
Consumers’ choices are prey to subtle discrepancies that arise in cognitive accounting and identifying how and when you are susceptible is an important step in improving the decision making process (Tvorik, 2014). This paper will consider why people value gains and losses differently in different circumstances by addressing what mental accounting is and how it impacts consumer decision making; and how a company can take advantage of their consumers’ mental accounting (Tvorik, 2014). This writer will also consider different scenarios from differing points of view; as a marketer and as a consumer. As a marketer, this writer ...view middle of the document...
This is used more frequently as discretionary money because it is being considered “free” income even though it is really just their own money, minus interest, being returned to them (Vedantam, 2007).
The sunk cost effect is “paying for the right to use a good or service will increase the rate at which the good will be utilized” (Thaler, 1980). Thaler (1980) explains the sunk cost effect concept in terms of pleasure and pain:
In terms of prospect theory, pleasure can be thought of as the value function in the domain of gains while pain corresponds to the value function in the domain of losses. When will a customer feel pain? Pain will not be felt when a purchase is made for immediate consumption (like buying a hamburger for lunch) as long as the price is ‘reasonable’… Only in the event of a loss will there be actual net pain.
Alternately if one was purchasing an asset, or something that will provide future benefit, no pain or pleasure is felt at time of purchase, but at the time the good is used or service has been provided (Thaler, 1980).
Marketing is a company’s best tool to take advantage of consumers’ mental accounting. “People prefer a supposedly free incentive to an equivalent price discount [and] people often behave irrationally when thinking about future consequences” (Welch, 2010). The challenge is not only beating competitors but convincing consumers to spend their money since they always have the option of not doing so (Welch, 2010). According to Welch (2010), by offering a delay of payment companies can increase their customers’ willingness to buy; even small delays in payment can soften the sting of parting with their money. Some mental accounts for spending include windfall gains, pocket money, income and savings. Income is less easy for consumers to spend and savings is the most difficult so understanding this and acknowledging the barrier can benefit a company by adjusting their marketing strategy (Welch, 2010).
Another way to leverage consumer mental accounting is to make the product something the customer would deem as a necessity. The concept of reason-based choice explains that consumers make purchasing choices using mental accounting based on reasons that are constructed to justify decision implicitly or explicitly (Kivetz, 1999). Kivetz (1999) explained that consumers who reasoned with themselves implicitly may be more likely to purchase necessities because they are needed rather than purchase luxury goods which could be considered waste, where as customer’s who have the opportunity to explicitly defend their purchases to others find it easier to purchase luxury items. Marketers and their companies can benefit from this by creating the perception that a product is a necessity rather than a luxury item, making it more likely to increase sales, or to encourage consumers to talk about it.
As a marketer, recognizing and understanding my own mental accounting tendencies will only benefit my career. I will be able to...