1. MENTAL ACCOUNTING Tasdik Syed and David Hammel

2. Definitions  One unit or piece must be perceived as equivalent to any other and capable of mutual substitution  The system (sometimes implicit) that households use to evaluate, regulate, and process their home budget Fungible Nature of MoneyMental Accounting

3. http://ca.youtube.com/watch?v=d4 FsBeLZhmk Interview with Gene Hackman and Dustin Hoffman

4. Outcomes of Mental Accounting  Potentially Harmful Outcomes  Gambling with “House Money” and “Break-even” effects  Interest Rates & Consumer Behaviour  Potentially Beneficial Outcomes  Saving for an objective

5. Gambling with House Money… Thaler, Richard H.,and Eric J. Johnson. " Gambling with house money and trying to break even: the effects of prior outcome on risky choice" Management Science 36 (1990):643-60

6. House Money Effect  People are more willing to gamble with money they consider “house money”  Increased risk seeking in the presence of a prior gain.

7. Break-even Effect  In the presence of prior losses, outcomes which offer a chance to break even are especially attractive.

8. Examples Winner Loser

9. Interest Rates & Consumer Behaviour Gross, David B., and Nicholas S. Souleles. "Do Liquidity Contraints and Interest Rates Matter for Consumer Behaviour? Evidence from Credit Card Data." Quarterly Journal of Economics 117 (2002): 149-85

10. Interest Rates & Consumer Behaviour  This paper utilizes a unique data set of credit card accounts to analyze how people respond to credit supply.  Many credit card borrowers simultaneously hold low-yielding assets.  Behavior is puzzling & inconsistent with any conventional model.

11. Mental Accounting Paradox  Mentally divide money for different purposes, and tend to be reluctant to change our thinking, even when it is against our interests.  Assign different sources of money to different purposes, despite the fact that money is completely interchangeable.

12. Useful application of mental accounting:  Put money away for university tuition fees and student loans  Save a certain percentage of current income for future spending  However, be aware of the paradox

13. Thank you