Mental Accounting and Small Windfalls: Evidence from an Online Grocer

Milkman, Katherine L.; Beshears, John

doi:10.2139/ssrn.1018382

Cited by 19 publications

(12 citation statements)

References 41 publications

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“…Such mental accounting can also occur at the level of individual expenditure categories. For example, Milkman and Beshears (2009) document a flypaper effect-money sticks where it hits-with shopping coupons.…”

Section: Purchases Of Durablesmentioning

confidence: 99%

Behavioral Household Finance

Beshears

Choi

Laibson

et al. 2018

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This chapter provides an overview of household finance. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: consumption and savings, borrowing, payments, asset allocation, and insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: education and information, peer effects and social influence, product design, advice and disclosure, choice architecture, and interventions that directly target prices or quantities. This chapter is divided into two parts, each of which is further divided into several sections. The first part summarizes key facts regarding household financial behavior, emphasizing empirical regularities that are inconsistent with the standard classical economic model and discussing both extensions of the classical model and explanations grounded in behavioral economics that can account for the observed patterns. This part covers five topics: (I) consumption and savings, (II) borrowing, (III) payments, (IV) asset allocation, and (V) insurance. The second part addresses interventions that firms, governments, and other parties deploy to shape household financial outcomes: (VI) education and information, (VII) peer effects and social influence, (VIII) product design, (IX) advice and disclosure, (X) choice architecture, and (XI) interventions that directly target prices or quantities. The final section of the paper (XII) concludes. John BeshearsWe offer broad coverage of the household finance literature, but we limit the scope of our discussion along some dimensions. We focus on the U.S. institutional context and on empirical work based on U.S. data, although we do bring evidence from other wealthy countries to bear when germane and occasionally reference evidence from developing countries. We address household asset allocation but do not draw out its implications for asset pricing, which are covered by the asset pricing chapter in this handbook. Although household decisions regarding health care are relevant to household finance, we largely omit this literature from our chapter because it is covered in depth in the chapter on behavioral health economics. Finally, there is some overlap between our section on financial product design and the chapter on behavioral industrial organization; we refer readers to that chapter for related material on that topic. Part 1: Facts I. Consumption and SavingsBeginning with the seminal work of Modigliani and Brumberg (1954) and Friedman (1957), economists have embraced the view that households choose to save and borrow to smooth consumption over the lifecycle. Intuitively, if agents have concave utility functions over consumption, then they should spread consumption across time to optimally...

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Section: Purchases Of Durablesmentioning

confidence: 99%

Behavioral Household Finance

Beshears

Choi

Laibson

et al. 2018

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“…By using an incentivized laboratory experiment, we exclude this possibility. Fourth, the only existing studies investigating consumption decisions in incentivized environments analyze how people spend a gift or a windfall gain (e.g., Bodkin 1959, Arkes et al 1994, Milkman & Beshears 2009). Most windfall gains are negligibly small compared to life-time wealth and should not alter spending behavior if customers treat wealth and windfall gain as fungible; but these studies find that people spend more after receiving a gift or windfall gain.…”

Section: Introductionmentioning

confidence: 99%

Fungibility, Labels, and Consumption

Abeler¹,

Marklein²

2016

Journal of the European Economic Association

110

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The focus for the Centre is research into individual and strategic decision-making using a combination of theoretical and experimental methods. On the theory side, members of the Centre investigate individual choice under uncertainty, cooperative and non-cooperative game theory, as well as theories of psychology, bounded rationality and evolutionary game theory. Members of the Centre have applied experimental methods in the fields of public economics, individual choice under risk and uncertainty, strategic interaction, and the performance of auctions, markets and other economic institutions. Much of the Centre's research involves collaborative projects with researchers from other departments in the UK and overseas. Fungibility of money is a central assumption in the theory of consumer choice: any unit of money is substitutable for another. This implies that the composition of income or wealth is irrelevant for consumption. We find in a field experiment that even in a simple, incentivized setup many subjects do not treat money as fungible.When a label is attached to a part of their budget, subjects change consumption according to the label. A controlled laboratory experiment confirms this result and further shows that subjects with lower cognitive abilities are more likely to violate fungibility. The findings lend support to behavioral models of narrow bracketing and mental accounting. One implication of our results is that in-kind benefits distort consumption more strongly than usually assumed.JEL classification: C91, C93, D01, H31, I38.

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“…On mental accounting, Arkes et al (1994) and Milkman and Beshears (2008) have shown that consumers in laboratory experiments spend more out of their unexpected income than that out of anticipated income. Propensity to spend windfall income is larger than that to regular income and the former decreases as the windfall size increases (Bodkin, 1959;Bird & Bodkin, 1965;Keeler et al 1985).…”

Section: Traders' Psychologymentioning

confidence: 99%

Stocks’ pricing dynamics and behavioral finance: A review

Sinha¹

2015

10.5267/j.msl

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In a brief review of the literature on stocks' pricing, the study shows that information vis-à-vis noise serves critical roles in the equilibrium process. It is dynamic in nature and there are different infiltrating aspects from the standard finance to behavioral finance points of views. The aspects of market efficiency, fundamental risk, noise traders' risk, and implementation costs make the stock markets noisy and thereby, limit the arbitrage opportunity of informed traders. Investors' psychological bases viz., belief and preferences contribute more in the equilibrium process. Beliefs include representativeness, conservativeness, and anchoring, availability biases, optimism and wishful thinking, overconfidence, and herd behavior tendency on the part of the investors. On the preferences, investors are influenced by disposition effect, prospects based on reference points, mental accounting, ambiguity aversion, and self control.The study explores the empirical literature also and reviews the six puzzles in the standard finance. Finally, the work identifies a few research gaps to be addressed in the literature.Growing Science Ltd. All rights reserved. 5

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Mental Accounting and Small Windfalls: Evidence from an Online Grocer

Cited by 19 publications

References 41 publications

Behavioral Household Finance

Behavioral Household Finance

Fungibility, Labels, and Consumption

Stocks’ pricing dynamics and behavioral finance: A review

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