Mental Accounting

By Ben Ambridge


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One of the names that keeps coming up time and again in this video series is Richard Thaler, who really did write the book on much of consumer psychology. Today we’re going to talk about one of Thaler’s most famous psychological theories: Mental accounting (which is also sometimes called psychological accounting).

This is one of those fascinating psychological traits that you’ve probably never really thought about. But as soon as I explain what it is, you’ll either think “Yeah that sounds exactly like me” or – if not – then “Yeah, I don’t do this, but it sounds exactly like so and so”.

So, what is mental accounting? This is when people keep a separate account for every different type of purchase. So, they might set themselves one monthly budget for eating out and another monthly budget for supermarket shopping. This sounds sensible, in principle, but it doesn’t always work out that way.

For example, someone who did this might find themselves turning down even a cheap meal out, and then spending twice as much on an expensive ready-meal to eat at home. When all the accounts are drawing on the same overall resource – the amount of money you have – it doesn’t make much sense to have budgets for each and every category, at least not if you don’t make adjustments between them.

This is a fairly trivial example, but there are also more serious ones. For example, some people treat cash in their wallet and number in their bank account as almost two completely unrelated things.

Quite a few studies have shown that people spend much less in shops when they’re using cash, because they’re comparing the cost of their purchases to a relatively small mental account. Even a £5 purchase feels like a big deal when it’s coming out of a mental account – the money in your wallet – that has, say, just £30 in it.

On the other hand, when you’re paying with a credit or debit card (either one don’t actually seem to make any difference), the money is coming out of a much larger mental account – all the money you have in your bank.

As an eCommerce business, you already have an advantage over bricks and mortar shops in that none of your transactions are going to be in cash. For example, if you can get your customers to pay an annual subscription for inclusive delivery (as a few sites have managed to do) then the delivery costs of any individual purchase won’t have to come out of any monthly budget.

Similarly, people who sell things on eBay, and get paid in PayPal often have a tendency to treat their PayPal account as a separate budget, which they are often more willing to spend than what they think of as “real money” in their bank account (I’m definitely guilty of this one).

Another place you can potentially make use of mental accounting is to offer the same product or service in different categories; hopefully categories that map onto customer’s mental accounts.

Obviously, a site with thousands of products needs categories for purely logistical reasons. But even if you don’t have that many different offerings, different categories still might be helpful in terms of mental accounts. For example, suppose you list the same product in “Gifts”, “Clothes” and “Childrenswear”. A customer who’s reached their monthly budget for clothing might still buy clothes out of their mental “gifts” budget, or children’s clothes out of their mental budget of “buying stuff for my kids”.

In short, the take-home message is this. People have different budgets for different categories of products, so if you can convince them that what they’re buying is coming out of generous budget rather than one that is almost empty, then you can take advantage of the psychological principle of mental accounting.

Ben Ambridge
Hi, I’m Ben. I’m a Reader in Psychology at the University of Liverpool and I lead consumer psychology at Endless Gain. I’m interested in how research findings from academic psychology can be applied in our everyday lives as consumers. And, importantly how psychology plays an influential role in ecommerce. I write a weekly psychology column for The Observer, and my book Psy-Q: You Know Your IQ - Now Test Your Psychological Intelligence has been translated into 15 languages. Check out my TED talk, "Ten Myths about Psychology, Debunked".

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