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February 02, 2021 Tuesday 07:53:22 AM IST

What is Mental Accounting? How does it impact our purchases and consumption?

Mental Accounting is a concept that describes the mental processes we employ to organise our resource use. Human beings tend to create separate mental budget compartments where specific acts of consumption and payments are linked. It is a concept known to psychology researchers since the 1980's.

How does it affect consumer behaviour?

Mental accounting describes how the human mind functions when performing acts of consumption. For eg. someone bought a movie ticket in advance and cannot find the ticket on entering the Cinema. He or she will not typically buy a second ticket. Their film budget has already been spent. This example illustrates how our tendency to mentally segment budgets and link them to specific acts of consumption.

Is this concept applicable only to private consumption goods?

No. The concept can be used to fine tune the way policy instruments are designed to fight climate change, improve prevention and promote sustainable behaviour, according to Tobias Brosch, Professor in Psychology of Sustainable Development at University of Geneva (UNIGE) Faculty of Psychology and Educational Sciences. "Someone who makes an effort to cycle to work every day will use this argument to justify to himself or others, buying a plane ticket to go on holiday to the Seychelles. A possible intervention strategy to prevent this is to encourage people to create differentiated mental accounts using targeted messages."

How can it impact sustainability measures?

A rebound effect happens when people start spending after investing in an energy-saving device. A negative energy balance can be created when people fail to adapt their budgets to a new situation. For eg. people who buy an energy-efficient car may feel inclined to use it more often, cancelling out potential energy savings.  To tackle this phenomenon, the psychologists suggests informing people about the real energy costs of their new car so they can update their consumption budget. Our minds create mental accounts with precise labels. The mental account that is opened when we receive a sum of money in a specific context determines what the money will be spent on.  "A monetary gift received for a birthday will be labelled ‘pleasure’, and will most likely be spent on pleasurable experiences», says Professor Brosch by means of illustration. This can be problematic in the context of sustainable decision-making. For instance, the financial returns on solar panels installed at home appear only indirectly in the electricity bill and are not explicitly labelled as «energy saving». Accordingly, people will not necessarily think about reinvesting this money in new sustainable measures. "Clear labels are needed. In Switzerland, part of the carbon levy is returned to citizens via a reduction in health insurance costs. It would be better to label such an income ‘Climate action revenue’”, argues Tobias Brosch.

What are the implications of using mental accounting in public policy making?

The study done by UNIGE faculty has proposed that governments should clearly inform the people about price of energy, make the message salient and demonstrate the impact of consumption on CO2-emissions through concrete feedback, according to Ulf Hahnel, Senior Researcher at UNIGE. Bounded rationality including mental accounting can help introduce policies for climate change mitigation in addition to price-oriented ones, according to Valentino Piana, senior economist at HES-SO. The researchers aim to provide a behavioural tool box for policy makers to develop strategies based not just on scientific evidence but also on ethical considerations as the same time respecting the free well of citizens.

Source: University of Geneva