MS PROFESSOR ONLY

Running head: EXPECTED VALUE

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, pg. 183). Using mental accounting aids consumers in the deconstruction of complex budgeting problems so as to enable them to make smaller decisions; in turn making the overall budgeting plan of the household to be more manageable for the consumer’s pockets (Schweitzer, 1999, pg. 52). This paper will examine how mental accounting methods can be used by consumers to make those decisions most important in our homes.

When consumers use the mental accounting method do not comply with the standards relating to the normative model, which is defined as standards used when evaluating a decision where the consumer makes an independent observation of the situation in an attempt to achieve the correct answer (Baron, 2012, par. 6). When consumers use mental accounting, they instead begin to “mentally track” both the costs of a purchase as well as how completing the purchase will benefit their household (Okada, 2001, par. 10). By tracking costs and benefits consumers are able to separate their monies therefore spending it discretely on their mental accounts as they see fit (Schweitzer, 1999, par. 4). Remember, consumers are no different than businesses; they both take time to study both their gains and losses (Schweitzer, 1999, par. 5).

The mental accounting method is useful when the time comes to purchasing new appliances for the kitchen. Many consumers take into consideration the length of time they have owned the old appliance and whether or not it is still in useable condition (or its depreciation value) (Okada, 2001, par. 11). These methods encourages prospective thinking at the onset of the situation and offers memories of whether or not the appliance was useful to the consumer from the beginning; if it was not, then why purchase another (Okada, 2001, par. 12)? A painful memory will control the decision making process of a consumer therefore limiting their experience of home improvement.

In the article Consumer Responses to Unexpected Price Changes: Affective Reactions and Mental Accounting Effects (Cheema & Soman, 2002) mental accounting causes consumers’ purchasing to change when prices veer from their norm or historical levels. When goods are offered at decreased prices consumers’ purchase quicker and depending on the good being offered (for instance groceries) tend to purchase more. Companies understand the logic of mental accounting and tend to use it to their advantage. For instance, Publix uses the BOGO (Buy One Get One free) theme along with coupons to entice its customers to come in a save money while making their grocery purchases. This works for the organization because many families are living on severely fixed budgets and the offer of purchasing two boxes of crackers for $2.99 rather than spending $5.98 (the cost of both) is seemingly good.

A survey performed by Cheema & Soman (2002) shows that while consumers may make a purchase at regular price (usually grumbling), should the same item be offered at a discounted or sale price the purchase will be made and the consumer will walk away feeling as if he is richer. In other words, the consumer is more apt to buy at the sale price rather than the suggested retail or regular price. An example of this could be the purchase of a vehicle. The consumer knows exactly how much he can afford for this particular purchase and goes in with a set price in mind. With today’s technology, many have searched the internet looking for the perfect car and the best price and the minute they set foot on the car lot, know exactly what they are looking for and how much it should cost. However, the salesperson is trying his best to make a commission and will stop at nothing to ensure that his bills get paid. As we learned earlier in our studies, the power of persuasion can make that consumer with his mind already set purchase something totally different (Argosy University, 2014). This can be done by not only offering a huge discount, but by throwing in special offers such as free oil changes for life, and new tires.

The marketers of a company take advantage of the cognitive accounting of its consumers in its advertisements. Showing blindfold taste tests on screen where those surveyed choose the same product encourages consumers to go purchase the product and try it for themselves. Placing coupons in Sunday newspapers along with sales papers offering various goods at lowered prices pulls in consumers as well. Both Wal-Mart and Target offer price comparisons where customers find the exact product offered in their store somewhere else at a discount price and are allowed to purchase it for that price from them.

As consumers these pitfalls can be avoided by preparing oneself ahead of time for the persuasive tactics that will be tried when we attempt to make our purchase. For example, when purchasing a new refrigerator one should already know what it needed for their household. If the consumer lives alone and is rarely at home, why purchase a refrigerator with a large freezer and several bins? It is important for the consumer to “stick to the plan” when making new purchases and by using mental accounting, one is prepared and knows how the new purchase will benefit him and what these benefits will cost.

References

Argosy University. (2014). Module 2 Lecture Notes. Retrieved from http://www.myeclassonline.com

Barron, J. (December 24, 2012). The point of normative models in judgment and decision making. Frontiers in Psychology, 3. Retrieved from http://www.frontiersin.org/Journal/FullText.aspx?s=196&name=cognitive_science&ART _DOI=10.3389/fpsyg.2012.00577

Cheema, A., & Soman, D. (2002). Consumer Responses to Unexpected Price Changes: Affective Reactions and Mental Accounting Effects. Advances in Consumer Research, 29(1), 342- 343. Retrieved from http://web.b.ebscohost.com.libproxy.edmc.edu/ehost/pdfviewer/pdfviewer?vid=7&sid=ca a93d80-f126-425d-8f44-37e74c2c3cc9%40sessionmgr113&hid=122

Okada, E. (2001). Trade-ins, Mental Accounting, and Product Replacement Decisions. Journal of Consumer Research, 27(4), 433-446. Retrieved from http://libproxy.edmc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&d b=fsr&AN=5244527&site=ehost-live

Schweitzer, M. E. (1999). The Construction of Mental Accounts in Benefits Decision Making. Benefits Quarterly, 15(1), 52-56. Retrieved from http://web.a.ebscohost.com.libproxy.edmc.edu/ehost/pdfviewer/pdfviewer?sid=87b8241e -0125-434e-9a08-555449689772%40sessionmgr4004&vid=8&hid=4107

Thaler, R. H. (1999). Mental Accounting Matters. Journal of Behavioral Decision Making, 12(3), 183-206. Retrieved from http://faculty.chicagobooth.edu/Richard.Thaler/research/pdf/MentalAccounting.pdf

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