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Mental accounting describes the psychological creation of separate accounts or budgets for categories of decisions. This process simplifies complex budget decisions in ways that significantly affect consumer behavior (Kahneman and Tversky 1981, 1984) and has been incorporated into economic theory (Shefrin and Thaler 1988). The impact of mental accounts on benefits decisions is likely to be significant. The creation of these accounts is context dependent, and prior work has demonstrated that the source and timing of payments affects the allocation of resources into mental accounts. Results from this work demonstrate that other normatively unimportant factors of the choice such as presentation order impact the construction of mental accounts. These results describe mental accounting biases within the context of health care benefits and demonstrate that the construction of mental accounts is highly unstable and easily manipulated within this domain.
Mental accounting describes the psychological construction of separate budgets for categories of decisions. These accounts afford cognitive simplicity since they deconstruct complex budget problems into small, local decisions. For example, a consumer who deconstructs the job of financial planning into many decisions may separate the decisions of how large a car loan to assume and how much money to save for a child's education.
While segregating these decisions makes the overall budget decision process more manageable, the use of mental accounts can lead to decision bias. Consider the example of a consumer who, by using mental accounts, separates the decisions to borrow money for a car loan and save for a child's college education. Such a consumer might simultaneously borrow $10,000 at 10% interest and deposit $10,000 into a savings account to earn 4% interest.
Tversky and Kahneman (1981) first reported mental accounting as a potential for decision bias in a set of experiments in which subjects altered their preferences as a function of how they had lost money. In their theater ticket example, subjects were more likely to purchase a (general admission) $10 ticket when they had lost $10 cash than when they had lost a previously purchased ticket.
Mental accounting effects have been widely used to explain economic phenomena. These effects play a role in household budgeting decisions (Thaler 1985), stock market transactions (Shefrin, Statman and Constantinides 1985) and life cycle consumption (Shefrin...