Articles

A Model of Mental Accounting and Reference Price Adaptation

M. BAUCELLS, W. HWANG

Management Science

December 2017, vol. 63, n°12, pp.4201-4218

Departments: Information Systems and Operations Management

Keywords: Mental accounting, reference price, loss aversion, sunk-cost fallacy, payment depreciation, reluctance to trade, flat-rate bias.

http://pubsonline.informs.org/doi/abs/10.1287/mnsc.2016.2569


Consumers possess a mental account that stores the worth of items purchased and yet to be consumed. Reference prices act as the book values of these items. Movements in the account—the comparison between the reference price and the price paid at entry, and the comparison between the benefit of consumption and the reference price at exit—yield hedonic benefits. The reference price is determined by a psychological process of adaptation to the price evoked by the trade. The model is integrative, in that it explains a wide array of observed anomalies such as sunk-cost effects, payment depreciation, reluctance to trade, preference for pre-payment, and the flat-rate bias. The model also generates new testable implications


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