Consumers’ choices are prey to subtle discrepancies that arise in cognitive accounting. Learning how and when you are prey to these discrepancies is an important step in improving your decision...

RUNNING HEAD: EXPECTED VALUE AND CONSUMER CHOICES

Expected Value and Consumer Choices
Student’s name
Name of the Institute
EXPECTED VALUE AND CONSUMER CHOICES 2
Contents
Answer 1. ............................................................................................................................................................ 3
Answer 2. ............................................................................................................................................................ 4
Answer 3. ............................................................................................................................................................ 4
Answer 4. ............................................................................................................................................................ 5
References ........................................................................................................................................................... 7
EXPECTED VALUE AND CONSUMER CHOICES 3
Answer 1.
Mental Accounting is defined as the process in the mind of the person that attempts to
analyze, code, classify and evaluate the economic outcomes. It basically includes the
behavioral life cycle hypothesis, which defines that people frame the assets in their minds
that belong to their current income or wealth or future income or wealth, which effects their
behavior of the accounts and thus decides the marginal propensity to consume of each of the
accounts.
Any person doing mental accounting frames the transaction in his/her mind and thus
evaluates its utility and chances of receiving that utility. The utility is then compared to the
opportunity cost and the inclination and interest is the driving force that works against the
opportunity cost and therefore, final decision is made.
Mental Accounting has an impact on consumer decision making through a Modified
Utility Function (Thaler, Richard, 1985, pp. 205). In this there are two values that are
connected to any transaction:
 Acquisition Value: To acquire any physical good, the amount of money that is to be
paid is called as its acquisition value.
 Transaction Value: The difference between the mental price and the actual price paid.
If the mental price is higher than the price paid, transaction value is positive.
Hence, when the consumer finds that the transaction value for a good is negative, it
effects the decision making and he only buys the product if it is needed...