Expected Value And Consumer Choices Management Decision Mode

Expected Value and Consumer Choices Management Decision Models B6025-P A02 Tricia Jones Dr.

Expected Value and Consumer Choices Management Decision Models B6025-P A02 Tricia Jones Dr. Amy Puderbaugh Argosy University July 9, 2014 Expected Value and Consumer Choices Mental accounting is defined as “the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of their financial activities” (Thaler, 1999, p. 183). Using mental accounting aids consumers in breaking down complex budgeting problems, enabling them to make smaller, more manageable decisions; ultimately making their overall household budgeting more sustainable and less overwhelming (Schweitzer, 1999, p. 52). This paper explores how mental accounting methods influence consumer decision-making, particularly regarding important household purchases.

When consumers employ mental accounting, their decision-making deviates from the normative model, which posits that individuals evaluate decisions based on objective standards aiming for the best choice through independent observation (Baron, 2012). Instead, consumers tend to “mentally track” both the costs and benefits of purchases, considering how each expenditure will serve their household’s needs. This mental tracking allows consumers to allocate funds discretely across different mental accounts, which can influence their overall budgeting and spending behaviors (Okada, 2001). For example, when purchasing new appliances, consumers consider factors such as how long they have owned existing appliances, whether those appliances are still functional, or their depreciation value (Okada, 2001). These reflective practices initiate prospective thinking, encouraging consumers to assess whether their previous investments were worthwhile and whether further expenditure is justified.

Despite its usefulness, mental accounting can sometimes lead to suboptimal decision-making, especially when emotional memories or biases influence consumer choices. Cheema and Soman (2002) found that consumers' reactions to unexpected price changes are often affected by mental accounting, where they tend to respond more favorably to discounts or sales. For instance, consumers may purchase more when items are offered at reduced prices, perceiving themselves as saving money or feeling temporarily wealthier. Retailers exploit this cognitive bias through marketing strategies such as buy-one-get-one-free (BOGO) offers and coupons, which encourage bulk buying and perceived savings. Grocery stores like Publix, for example, use these tactics to entice budget-conscious consumers to purchase more by framing deals as significant savings.

Research indicates that consumers often have a predetermined price threshold for purchases, such as automobiles, where they set a maximum budget before visiting a dealership. When faced with persuasive sales tactics, additional incentives like free oil changes or discounted accessories can sway consumers from their initial plans. Marketers understand that leveraging mental accounting influences purchasing behavior, especially when products are positioned as discounts or value deals. For consumers, the challenge lies in preparing for such tactics—being aware of their own budget limits and needs before engaging in purchase decisions; for instance, knowing whether a large refrigerator is necessary based on household size and lifestyle. By aligning these decisions with a well-structured mental accounting system, consumers can avoid impulsive buys and ensure their expenditures are aligned with their financial goals (Thaler, 1999; Schweitzer, 1999).

Furthermore, understanding the psychological impact of marketing strategies can empower consumers to resist impulsive spending triggered by marketing stimuli. For example, knowing that marketers often create a perception of savings or greater value can help consumers remain committed to their original budget. As both consumers and businesses weigh gains and losses, mental accounting becomes a vital factor in financial management (Okada, 2001). Recognizing the role of mental accounting in everyday decisions allows consumers to make more deliberate choices, especially in high-stakes scenarios such as large household appliances or vehicle purchases.

Conclusion

The concept of mental accounting plays a significant role in shaping consumer behavior, particularly in how individuals organize and evaluate their financial decisions. While this cognitive process simplifies complex budgeting tasks and fosters prospective thinking, it also introduces biases that can lead to suboptimal choices. Marketers skillfully exploit mental accounting biases through promotional strategies that emphasize discounts and perceived savings. Consequently, consumers need to develop awareness of their mental accounting practices and establish clear financial boundaries to mitigate the effects of such marketing tactics. By doing so, they can enhance their decision-making processes, ensuring that purchases serve their long-term household interests rather than impulsive or emotionally driven choices.

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