Matuszak Blog - accounting 16.1.2005

Mental accounts

Modernity has taught us not to accept a certain way of doing things just because things have always been done in that way (p. 80).

Consider being posed with this problem:

Imagine that you have decided to see a play where admission is $20 a ticket. As you enter the theater you discover that you have lost a $20 bill. Would you still pay $20 for a ticket to the play? (Kahneman & Tversky, 1984, p. 347)

Almost 90% of people asked this question said yes.
In contrast:

Imagine that you have decided to see a play and paid the admission price of $20 a ticket. As you enter the theater you discover that you have lost the ticket. The seat was not marked and the ticket can not be recovered. Would you pay $20 for another ticket? (Kahneman & Tversky, 1984, p. 347).

Now, less than 50% of people said yes. What is the difference between the two cases? From one perspective, they seem the same; both involve seeing a play and being $40 poorer or not seeing it and being $20 poorer. Yet people don't seem to see them as the same. What Kahneman and Tversky have suggested is that the difference between the two cases has to do with the way in which people frame their psychological accounts. Suppose that in a person's internal accounting system there is a cost-of-the-theater account. In the first case, the cost of the theater is $20; the lost $20 bill is not properly charged to that account. However, in the second case, the cost of the theater is $40 (two tickets), and for many people, $40 is too much to pay. On the other hand, suppose that the person's internal accounting system has a cost-of-a-day's-outing account. Now the two cases may well be equivalent in that the lost ticket and the lost $20 both add the same amount to the cost of the day. So some people keep narrow cost-of-the-theater accounts, whereas others keep broader cost-of-the-day accounts. Which of them is rational? What is the way in which rational decision makers should keep their accounts?
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