Mental Accounting

Logic

Emotion

Consider this…

First situation: You bought a theatre ticket for 100 bucks. At the theatre entrance, you discover that you lost your ticket!

Would you buy another ticket for 100 bucks?

Second situation: On your way to the theatre to see a play for which the ticket costs 100 bucks, you discover that you lost 100

bucks on your way!

Would you still buy the ticket for 100 bucks?

Did you say a kind of ‘NO’ for first situation and a more certain ‘YES’ for second situation?

Did you say a kind of ‘NO’ for first situation and a more certain ‘YES’ for second situation?

100 bucks = 100 bucks!

Did you say a kind of ‘NO’ for first situation and a more certain ‘YES’ for second situation?

100 bucks = 100 bucks!

However, psychologically, more people are willing to pay 100 bucks for a lost 100 bucks, than to pay 100 bucks for a lost ticket!

You have 100,000 bucks in your savings account in the bank. You get a 100,000 bucks bonus. You need to spend 100,000 bucks on a new car. Which 100,000 bucks would you use?

Though both are equal, but, in your mind the savings account may be untouchable while the bonus is to enjoy!

You have 100,000 bucks in your savings account in the bank. You get a 100,000 bucks bonus. You need to spend 100,000 bucks on a new car. Which 100,000 bucks would you use?

This is mental accounting.

It occurs when we assign different values to equal monetary amounts due to psychological reasons.

The same amount of money is treated differently depending on whether it is a saving, a salary, a tax refund, a bonus, a lottery gain, or an inheritance.

As a manager, you ask two research suppliers to quote for a research study.

The quotations come back at 5,00,000 bucks for the first supplier and 4,90,000 bucks for the second. Would the 10,000 bucks difference be an important factor in deciding which supplier to assign the study to?

Probably not.

Now, to supervise the supplier's fieldwork, you need to fly to the research location. The airfare is 5000 bucks for your preferred airline, and 3000 bucks for a budget airline. Would the 2000 bucks be an important factor

in choosing which airline to fly with?

Probably yes.

Why would the 10,000 bucks not matter in the first case, while the 2000 bucks does in the second? You might say that as a percentage, the 2000 bucks saving out of 5000 bucks is more significant than the

10,000 bucks saving out of 5,00,000 bucks.

But a penny is a penny.

The real reason is usually

mental accounting

Or corporately

depart-mental accounting

Source: Why Smart Managers Can't Count?, Omar Mahmoud, Admap Magazine June 2003, Issue 440