Keepingtrack of a financial undertaking by a household is decisive inensuring that the ultimate expenditure does not leave a family broke.That has led to the formulation of a theoretical framework calledmental accounting. This essay provides a definition for the conceptof mental accounting and examines its values in consumers’decision-making and benefits to companies.
MentalAccounting and its Impact on Consumer Decision-Making
Inrelation to economics, Chen(2013)defined mental accounting as the psychosomatic conception ofdifferent accounts to keep record of all the financial activities. Itenhances easy decision making concerning tricky budgetary plans,hence, has enormous impacts on consumer behaviors. The development ofmental account has facilitated absolute timing of all consumerpayments as it now acts as the platform upon which clients make theright decisions (Chenet al., 2013).In tandem with that, the practice of mental accounting has beenredefined to include rules and agreements which ensure correctdecision-making by the consumers outcomes are perceived alongsidethe assessment of how decisions are made.
AdvantagesTaken by Companies on Consumers’ and Examples
Regardingthe users’ mental accounting, companies have tendencies tomanipulate the majority of consumers so as to accrue more gains. Forinstance, a company will involve numerous goods with countlesspositive dimensions with the aim to increase its benefits. In turn,such companies make the total sum of the goods appear more superioras perceived by the clients (Chenet al., 2013).Additionally, firms normally have a clear advantage in marketing itsproducts when costs are added to another large purchase sinceconsumers have a habit of integrating losses (Mullainathanet al., 2013).For instance, a consumer buying a household will highly depend on theadditional costs despite the high cost of purchasing. According toMullainathan(2013),mental accounting principle upholds decisions alternatives based onlosses and gains regarding the value functions and thus, consumersare loss averse.
DecisionFrames Made by Marketers to Benefit from Disparities Arising fromCognitive Accounting
Forthe extraction of more benefits related to the discrepancies arisingfrom cognitive accounting, a marketer must frame some decision plansas consumers typically prefer free incentives to the correspondingprice discounts when thinking about the future consequences(Chen et al., 2013).Specifically, a marketer should brand the cost of the products lessdemanding as most users can at times save their money for the nextday(Mullainathan, 2013).Therefore, a seller has to influence purchasers to portion their cashsince retailers have in mind that giving customers much period todelay payments can upsurge their readiness to purchase commodities.Secondly, a marketer should harness the influence of default optionas that will enhance the possibility of the default product beingchosen by the consumer (Chenet al., 2013).Thirdly, consumers should not be stunned by several choices as thatwill make them less likely to buy, and despite attracting morecustomers, only a few will purchase the goods (Mullainathanet al., 2013).
Pitfallsto Avoid by Consumers Caused by Cognitive Accounting
Agood investor must overcome or prevent the metal accounting drawbacksto be able to to make a rational investment choice. According toRong-DaLiang (2014),consumers should divide the sums of their total wealth into two majoraccounts. The first one is the retirement account, which will enablecustomers to protect their wealth for future use once they retire.Second is the speculation account, which enables the consumer tomaneuver around the financial markets for support.
Fromthe above considerations, the essentiality of mental accounting isdouble-folded it helps the consumers to adequately spend money atthe right time and purpose while also helping the marketers tomanipulate customer behaviors.
Chen,L., Kök, A. G., & Tong, J. D. (2013). The effect of paymentschemes on inventory decisions: The role of mentalaccounting. ManagementScience, 59(2),436-451.
Mullainathan,S., & Shafir, E. (2013). Decision making and policy in thecontext of poverty. Behavioralfoundations of public policy,24(8),281-300.
Rong-DaLiang, A., Lee, C. L., & Tung, W. (2014). The role of sunk costsin online consumer decision-making. ElectronicCommerce Research and Applications, 13(1),56-68.