chapter  19
10 Pages

Addition by Division: Partitioning Real Accounts for Financial Well-Being

ByGeorge Loewenstein, Cynthia E. Cryder, Shlomo Benartzi, Alessandro Previtero

If consumers had in! nite computing capacity and perfect self-control, they would estimate their total lifetime accumulation of wealth and decide whether to make each purchase by comparing the utility of that purchase to the utility of the next best use of the money, or in some cases, to the best use of money, in which case the purchase would not occur. However, for a variety of reasons, consumers ! nd it useful to set up mental accounts (# aler, 1985, 1999), which help classify di erent sources of income (Henderson & Peterson, 1992), di erent pools of savings (e.g., Shefrin & # aler, 1992; # aler & Shefrin, 1981), and di erent categories of spending (e.g., Heath & Soll, 1996), in some cases linking one set of categories (e.g., income sources) to another (e.g., spending categories; see, e.g., O’Curry, 1997). Although mental accounting strategies can yield patterns of behavior that deviate from rational standards (e.g., Arkes & Blumer, 1985; Tversky & Kahneman, 1981), people employ mental accounting for a reason. Mental accounts help consumers rationalize expenditures and enhance self-control (see # aler, 1985, 1999) and can, in certain situations, also help consumers derive greater enjoyment from their spending (Loewenstein & O’Donoghue, 2006).