Essays on Mental Accounting and Consumers' Decision Making

Abstract

This dissertation is structured in the form of two empirical essays, each investigating one type of irrational decision caused by mental accounting. The first essay, titled "Managing the Cost of Multiple Debt Accounts: A Behavioral Perspective", explores why many people pay off credit cards' with the lowest rate first when rationally speaking they should repay the debt with the highest rate most quickly. This essay suggests that irrationality emerges when people seek to close `mental accounts' associated with their credit cards and reduce the total number of outstanding loans rather than decrease the amount of total debt among all credit cards. Consumers want to be debt free. If they can get rid of debt, on even one credit card, they feel a sense of accomplishment which psychologically helps them manage remainder of their debt better. The second essay, titled "Saving by Overspending", explores consumers' over-expenditure and indulgent consumption when they make prepayments in the form of time, effort, or money toward a consumption goal. This essay proposes that people subconsciously try to get their prepayments' worth, but in fact they may be spending their money irrationally. In addition, contrary to common knowledge, this essay suggests that when a prepayment is unanticipated, the loss of self-control is often more prominent when prepayments are made with behavioral resources (e.g., time or effort) than equivalent monetary resources.

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