Presentation Transcript

1. Richard ThalerMental accounting and consumer choiceMarketing Science 1985

   Jussi Nykänen and Tuuli Ylinen

2. Example

   A: Your salary is 2000€ per month, and you have calculated your tax liability to be 23%. Each month, 460€ is thus withheld from your salary, and you receive 1540€ to your account. However, in April 2014 you receive a tax return stating you have paid too much tax during 2013, the correct liability being 20%. You will thus receive a tax refund of 720€ to your account in early December 2014. B:Your salary is 2000€ per month, and you have calculated your tax liability to be 20%. Each month, 400€ is thus withheld from your salary, and you receive 1600€to your account. In April 2014, you receive a tax return stating you have paid the correct amount of tax during 2013, and there are no further tax liabilities or refunds. Consider yourself in December 2013. Which scenario makes you happier? Consider yourself in December 2014. Which scenario makes you happier? Under which scenario are you more likely to go out for dinner in December 2014? Behaviouraldecisionmaking

3. Agenda

   Theoretical Background Theoretical Extensions Coding Gains and Losses Transaction Utility and Reference Price Budget categories Conclusions Examples and Discussion Behavioural decision making

4. Theoretical Background

   Standard consumer choice using utility functions is not useful for marketing purposes Only considers utility from the consumed good; price is a constraint to utility optimization Marketing attributes missing (framing not relevant) Thaler’s approach: Replace utility function with value function Value function as in prospect theory: allows us to consider gains and losses relative to a reference point Framing effects now possible: prices can directly yield value to consumer via comparison to reference price; consumption good attributes and price can be framed as gains and losses; goods can be framed to belong to a consumption category Behavioural decision making

5. Theoretical Background

   Properties of the value function Defined over gains and losses relative to a reference point, instead of absolute levels Concave for gains, convex for losses The function is steeper for losses than for gains Value function measures the value of an outcome relative to a reference point: ”value of getting X when expecting Y / comparing to Y” Behavioural decision making

6. Theoretical Extensions

   Coding gains and losses Extending to compound outcomes from prospect theory Transaction utility Utility gained inherently from the transaction itself Reference price Point of monetary reference for each potential transaction Budget categories Mental accounting does not maximize overall utility but rather categorized utility Behavioural decision making

7. Coding Gains and Losses

   Segregate gains Christmas presents given separately rather than packaged into single large present Integrate losses Credit card bill summed up as a single payment total per month Marketing example Teleshopping Behavioural decision making

8. Coding Gains and Losses:Mixed Gain and Loss

   Cancel losses against larger gains Voluntarily executed trades: gained utility from voluntary purchase “cancels” monetary loss Segregate “silver linings” Teleshopping “silver linings”: small special add-ons free of additional charge right after presenting the price Behavioural decision making

9. Transaction Utility and Reference Price

   Thaler expands consumer choice theory Total utility from buying a good is a sum of acquisition utility and transaction utility Acquisition utility Value of the good (gain), compared to its price (loss) Usually preferable to integrate gain and loss Transaction utility Utility depends on the price paid for the good, compared to a reference price - “getting a good deal” Reference price: “fair” price, expected price Behavioural decision making

10. Transaction Utility and Reference Price

    Reference price as fair price How much is ”fair” to ask for the good Consider how much you would ask your friend to pay for the good Producer costs closely related to feeling of fairness  A price can be objectively good but higher than what is considered ”fair” Reference price as expected price Consider willingness to pay / expected price level at different contexts  The price of one context can be considered ”too high” for another context Marketing example Grocery store chains referring to prices of other chains (Tesco, Sainsbury’s) Behavioural decision making

11. Budget categories

    Then how do people make consumption decisions? Optimize over total utility = acquisition utility + transaction utility Relax the requirement of fungibility Fungibility ~ funds are used where they yield maximum utility (global optimization under budget constraint) Instead, people typically think in consumption categories (food, transport, entertainment, etc.) and make decisions sequentially (as they arise) People do not optimize overall consumption, but optimize within each budget category in each time period Marketing example Marketing products as “luxuries” instead of “food” Behavioural decision making

12. Summary and Conclusions

    Thaler extends standard consumer choice theory to account for ‘mental accounting’ Utility is measured over gains and losses, relative to a reference point – gains and losses are combined in a nonstandard way Price can affect utility directly (“getting a good deal”) The context can determine what is considered to be a “fair” price People do not optimize total consumption but each category separately The theory now allows for framing effects, which are directly useful for marketing purposes Code gains and losses optimally in marketing materials (integrated or segregated) Marketing can be used to suggest reference prices for consumers Marketing can affect which consumption category the good falls into Behavioural decision making

13. Example 1a

    A: You’re at Gigantti buying an iMac for 2000€. The salesperson offers you an insurance for 200€. B: You own an iMac, which you bought 6 months ago for 2000€. Your insurance company calls you and offers a computer insurance as an add-on to your current home insurance for 200€. (Assume you have already paid this year’s home insurance bill.) In which scenario are you happier to pay 200€ for insurance? (Assume you value the insurance and that the terms are exactly the same under A and B) Behavioural decision making

14. Example1b

    A: You are employed by a Finnish company, receiving a salary of 2000€/month. Your income tax is 20%, which is withheld each month from your salary. You thus receive a paycheck each month, stating your gross salary, taxes paid (400€) and the net salary payable (2000€). In April, you receive a tax return stating you have paid the correct amount of tax during the past year, and there are no further tax liabilities. On net, you earn 19200€ per year. B: Assume Finland didn’t have tax withholding. You know your tax liability is 20% so you put aside 400€ each month from your 2000€salary to a special account that you have labeled ‘tax’ in your online banking system. In April, you receive a tax bill of 4800€. On net, you earn 19200€ per year. Which scenario makes you happier? Behavioural decision making

15. Example 2

    World’s greatest musician is coming to Finland to have the last concert of a farewell tour. The artist is in the form of her life and there is no chance to see the artist perform live ever again. You and your friend are huge fans and you are able to obtain a ticket while your friend is not. However, due to an urgent matter you will not be able to attend the concert and your friend is eager to buy the ticket. How much would you ask for the ticket from your friend if you received the tickets free of charge and the list price is 160€? What about if you paid a half price (80€) for the ticket? What about when your friend has earlier stated that she is willing to pay 250€ for the concert ticket? Let’s assume that you paid 80€. Strangeroffers 400€ for the ticket without your friend knowing of the ticket. To whom would you sell the ticket and with what price? Let’s assume that you paid 80€. Behavioural decision making