prospect theory and mental accounting – Flashcards
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Kahneman and Tversky - 1979 -how people consider risky outcomes -what should we do to maximize actual happiness -fathers of behavioral finance
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Prospect theory
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1. risk averse in regards to gains 2. risk seeking in regards to losses 3. losses loom bigger than gains 4. segregate gains 5. aggregate losses
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Big 5 Points
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1. segregate gains (infomercial) 2. integrate losses (side effects may include) 3. silver lining effect (take small gains away from big losses- rebates) 4. cancel losses against larger gains (not noticing small amount of taxes out of 401k)
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marketing products to maximize happiness
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people seek to lock in stock gains, selling stocks that have historically risen too soon
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disposition effect
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richard thaler (1980) -describes the process whereby people code, categorize and evaluate economic outcomes -people lump their assets into a number of non fungible accounts -people give names to their money
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mental accounting
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the thought that money has no labels and that people do not associate money with anything specific -does not hold true in mental accounting
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fungibility
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cash is limited and labeled more valuable so people refrain from giving away cash credit cards are in a mental account that is labeled as unlimited usable money so it gets spent first
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cash vs credit spending
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when income is not specified for a given account and will generally splurge rather than using it to pay high interest debt prone to this when amount seems small to us example-tax refund
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windfall
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1.get into the most protected account 2. capitalize on integration of losses 3. credit as a highly spendable account 4. capitalize on peoples' sense of windfall
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how firms/marketers use mental accounting
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system 1: intuitive and automatic (heuristics and biases and emotions) system 2: calculating but lazy (rational mind that may override system 1)
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system 1 and system 2 processing
