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Why do people feel more disappointed with certain sources of money?
Psychological accounting is a model of consumer behavior developed by Richard Thaler to describe how people code, classify, and evaluate economic outcomes. This model combines prospect theory and transaction utility theory to help us understand how people create different "mental accounts" in their minds, which in turn affects their purchasing decisions and reactions to economic outcomes. For example, people are willing to allocate money into different mental accounts, such as savings accounts, food expenses, or entertainment expenses. This not only helps them with budget management, but also affects their emotional reactions to some extent.
“All organizations, from General Motors to Single Family, have explicit and/or implicit accounting systems. Such accounting systems often influence decisions in unexpected ways.”
Human behavior is affected by "loss aversion", that is, the reaction to losses is stronger than the reaction to gains, which is well reflected in psychological accounting. For example, when people manage their finances from a mental “account,” they often have a stronger sense of loss about specific sources of money, such as bonuses or windfalls. When money from these specific sources is lost, people's emotional reactions are more intense than when they lose regular income.
Principles of psychological accounting
There are several basic principles of psychological accounting. The first principle is to separate gains and losses, meaning that people tend to view gains and losses separately rather than integrating them into an overall account. For example, a person might drive 20 minutes for a small deal but not put in the same effort to save a smaller amount on a larger item.
“People tend to isolate gains and losses in different mental accounts, which affects their decision-making process.”
Another principle is the account reference point. According to this principle, people will refer to their previous performance in the same account to decide how to act in the current decision-making process. For example, gamblers may be more willing to risk their bets on the final game because they view daily gains and losses separately, which psychologically affects their risk-taking behavior.
The pain of payment
Pain of payment refers to the negative emotional reaction people experience during the consumption process. For example, people feel unhappy when they see the fare in a taxi meter rising, which is the pain of paying. At this time, people will compare their expenses with the size of their account. The more they feel that the proportion of their expenses occupying their account is greater, the greater the pain of payment will be, thereby reducing consumption.
"There is a correlation between the pain of payment and the amount of debt held by consumers. Consumers who often experience high payment pain tend to have less debt."
Therefore, people's psychological tolerance will decrease when withdrawing expenditures from large accounts, but their payment pain will increase when withdrawing expenditures from small accounts. For example, when a person withdraws $30 from a $500 bank account, the pain experienced is typically less than when a person withdraws $30 from a $50 cash account.
Practical applications of psychological accounting
The concept of psychological accounting can be widely used in fields such as consumer psychology, industry marketing and public policy. In business, merchants use the principles of psychological accounting to design offers and discount strategies. For example, when a product contains multiple options, businesses will be more inclined to list each value-added service independently, which can promote sales.
"Psychological accounting can effectively explain consumer behavior and influence pricing strategies in the market."
In terms of public policy, policymakers can also use psychological accounting principles to help taxpayers better understand the impact of taxes and social benefits. For example, in research on the Food Assistance Program, it was found that different households did not use general principles to view assistance and other income when using funds, which supports the psychological accounting perspective.
Psychological accounting plays an important role in our decision-making process. Understanding the mechanisms and influencing factors behind it can better promote public welfare and consumers' mental health. This got us thinking, how does our psychology influence our response to loss and consumption behavior when faced with the source of money?
