The Mental Accounting of Sunk Time Costs: Why Time is not Like Money.
DilipSoman
Presenter: Soumitra Kundu
DilipSoman
Presenter: Soumitra Kundu
Mental accounting
An economic concept established by economist Richard Thaler(1980),
-which contends that individuals divide their current and future assets into separate, non-transferable portions.
The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.
Mental accounting
•Utility theory is a common currency theory
•All options are evaluated with respect to utility
•But all gains and losses are not viewed as the same.
–People seem to have a variety of mental accounts.
Imagine you are shopping for a calculator and a jacket, and you find them both at the same department store. The calculator costs $25, and the jacket costs $120. You are told that a store across town has both items, but the calculator is $15 cheaper at that store. Do you buy the items at that store or do you go across town.
Most people say yes. If the jacket is $15 cheaper, most people say no.
In each case, they have spent the same amount of money.
The idea is that people are creating separate mental accounts for different goals.
–Money for necessities
–Money for entertainment
–Spending money from one account does not affect others.
Imagine you have gone to the movies to see a show. You got to the front of the line and realized you lost $10, do you still go to the movie?
Most people say yes
Imagine you have gone to the movies to see a show. The ticket costs $10. You buy the ticket early in the day. When you get to the theater, you realize you lost the ticket. Do you buy another one? Most people say no.
An economic concept established by economist Richard Thaler(1980),
-which contends that individuals divide their current and future assets into separate, non-transferable portions.
The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.
Mental accounting
•Utility theory is a common currency theory
•All options are evaluated with respect to utility
•But all gains and losses are not viewed as the same.
–People seem to have a variety of mental accounts.
Imagine you are shopping for a calculator and a jacket, and you find them both at the same department store. The calculator costs $25, and the jacket costs $120. You are told that a store across town has both items, but the calculator is $15 cheaper at that store. Do you buy the items at that store or do you go across town.
Most people say yes. If the jacket is $15 cheaper, most people say no.
In each case, they have spent the same amount of money.
The idea is that people are creating separate mental accounts for different goals.
–Money for necessities
–Money for entertainment
–Spending money from one account does not affect others.
Imagine you have gone to the movies to see a show. You got to the front of the line and realized you lost $10, do you still go to the movie?
Most people say yes
Imagine you have gone to the movies to see a show. The ticket costs $10. You buy the ticket early in the day. When you get to the theater, you realize you lost the ticket. Do you buy another one? Most people say no.
Sunk Cost Effect
Traditional economic theories predict that people will consider the present and future cost and benefits when determining a course of action. Past costs should not be a factor.
Contrary to these predictions, people routinely consider historic, no recoverable costs when making decisions about the future. This behavior is called the sunk cost effect.
The sunk cost effect is an escalation of commitment and has been defined as the “greater tendency to continue an endeavor once an investment in money, time, or effect has been made.”
Sunk costs have two important dimensions:
Size (Monetary) and
Timing.
Consider the following two scenarios by exampleAfamilyhasticketstoabasketballgame,whichtheyhavebeenanticipatingforsometime.Theticketsareworth$40.Onthedayofthegame,abigsnowstormhitstheirarea.Althoughtheycanstillgotothegame,thesnowstormwillcauseahasslethatwillreducethepleasureofwatchingthegame.Isthefamilymorelikelytogotothegameiftheypurchasedtheticketsfor$40oriftheticketsweregiventothemforfree?The common belief is that the family is more likely to go to the game if they purchased the tickets. If the tickets been free, the account could be closed without a benefit or a cost
Sunk Cost Effect ----Will an individual exhibit a sunk cost effect if he or she had invested time (rather than money) in a endeavor?
Do individuals mentally account for time investments using the same principles as monetary investments?
Do they set budgets?
Time VS Money
Time can’t be inventoried or replaced Time is not as easily aggregated as money Accounting for money is a routine activity, but accounting for time is not
The Mental Accounting of Time Cost
Key components of mental accounting model
Individuals track costs that are relevant to a particular expense and assign these costs to the relevant mental account.
The prospect theory value function dictates that the negative value of the cost displays diminishing marginal utility.
Expenses and funds are grouped into categories and spending is constrained by implicit & explicit budgets.
Researcher examined whether time investments follow these principles by 8 statement with time & monetary version
The Mental Accounting of Sunk Time Costs: Why Time is not Like Money.
DilipSoman
Presenter: Soumitra Kundu
Mental accounting
An economic concept established by economist Richard Thaler(1980),
-which contends that individuals divide their current and future assets into separate, non-transferable portions.
The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.
Mental accounting
•Utility theory is a common currency theory
•All options are evaluated with respect to utility
•But all gains and losses are not viewed as the same.
–People seem to have a variety of mental accounts.
Imagine you are shopping for a calculator and a jacket, and you find them both at the same department store. The calculator costs $25, and the jacket costs $120. You are told that a store across town has both items, but the calculator is $15 cheaper at that store. Do you buy the items at that store or do you go across town.
Most people say yes. If the jacket is $15 cheaper, most people say no.
In each case, they have spent the same amount of money.
The idea is that people are creating separate mental accounts for different goals.
–Money for necessities
–Money for entertainment
–Spending money from one account does not affect others.
Imagine you have gone to the movies to see a show. You got to the front of the line and realized you lost $10, do you still go to the movie?
Most people say yes
Imagine you have gone to the movies to see a show. The ticket costs $10. You buy the ticket early in the day. When you get to the theater, you realize you lost the ticket. Do you buy another one? Most people say no.
Sunk Cost Effect
Traditional economic theories predict that people will consider the present and future cost and benefits when determining a course of action. Past costs should not be a factor.
Contrary to these predictions, people routinely consider historic, no recoverable costs when making decisions about the future. This behavior is called the sunk cost effect.
The sunk cost effect is an escalation of commitment and has been defined as the “greater tendency to continue an endeavor once an investment in money, time, or effect has been made.”
Sunk costs have two important dimensions:
Size (Monetary) and
Timing.
Consider the following two scenarios by exampleAfamilyhasticketstoabasketballgame,whichtheyhavebeenanticipatingforsometime.Theticketsareworth$40.Onthedayofthegame,abigsnowstormhitstheirarea.Althoughtheycanstillgotothegame,thesnowstormwillcauseahasslethatwillreducethepleasureofwatchingthegame.Isthefamilymorelikelytogotothegameiftheypurchasedtheticketsfor$40oriftheticketsweregiventothemforfree?The common belief is that the family is more likely to go to the game if they purchased the tickets. If the tickets been free, the account could be closed without a benefit or a cost
Sunk Cost Effect ----Will an individual exhibit a sunk cost effect if he or she had invested time (rather than money) in a endeavor?
Do individuals mentally account for time investments using the same principles as monetary investments?
Do they set budgets?
Time VS Money
Time can’t be inventoried or replaced Time is not as easily aggregated as money Accounting for money is a routine activity, but accounting for time is not
The Mental Accounting of Time Cost
Key components of mental accounting model
Individuals track costs that are relevant to a particular expense and assign these costs to the relevant mental account.
The prospect theory value function dictates that the negative value of the cost displays diminishing marginal utility.
Expenses and funds are grouped into categories and spending is constrained by implicit & explicit budgets.
Researcher examined whether time investments follow these principles by 8 statement with time & monetary version
The Mental Accounting of Sunk Time Costs: Why Time is not Like Money.
DilipSoman
Presenter: Soumitra Kundu
Mental accounting
An economic concept established by economist Richard Thaler(1980),
-which contends that individuals divide their current and future assets into separate, non-transferable portions.
The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.
Mental accounting
•Utility theory is a common currency theory
•All options are evaluated with respect to utility
•But all gains and losses are not viewed as the same.
–People seem to have a variety of mental accounts.
Imagine you are shopping for a calculator and a jacket, and you find them both at the same department store. The calculator costs $25, and the jacket costs $120. You are told that a store across town has both items, but the calculator is $15 cheaper at that store. Do you buy the items at that store or do you go across town.
Most people say yes. If the jacket is $15 cheaper, most people say no.
In each case, they have spent the same amount of money.
The idea is that people are creating separate mental accounts for different goals.
–Money for necessities
–Money for entertainment
–Spending money from one account does not affect others.
Imagine you have gone to the movies to see a show. You got to the front of the line and realized you lost $10, do you still go to the movie?
Most people say yes
Imagine you have gone to the movies to see a show. The ticket costs $10. You buy the ticket early in the day. When you get to the theater, you realize you lost the ticket. Do you buy another one? Most people say no.
Sunk Cost Effect
Traditional economic theories predict that people will consider the present and future cost and benefits when determining a course of action. Past costs should not be a factor.
Contrary to these predictions, people routinely consider historic, no recoverable costs when making decisions about the future. This behavior is called the sunk cost effect.
The sunk cost effect is an escalation of commitment and has been defined as the “greater tendency to continue an endeavor once an investment in money, time, or effect has been made.”
Sunk costs have two important dimensions:
Size (Monetary) and
Timing.
Consider the following two scenarios by exampleAfamilyhasticketstoabasketballgame,whichtheyhavebeenanticipatingforsometime.Theticketsareworth$40.Onthedayofthegame,abigsnowstormhitstheirarea.Althoughtheycanstillgotothegame,thesnowstormwillcauseahasslethatwillreducethepleasureofwatchingthegame.Isthefamilymorelikelytogotothegameiftheypurchasedtheticketsfor$40oriftheticketsweregiventothemforfree?The common belief is that the family is more likely to go to the game if they purchased the tickets. If the tickets been free, the account could be closed without a benefit or a cost
Sunk Cost Effect ----Will an individual exhibit a sunk cost effect if he or she had invested time (rather than money) in a endeavor?
Do individuals mentally account for time investments using the same principles as monetary investments?
Do they set budgets?
Time VS Money
Time can’t be inventoried or replaced Time is not as easily aggregated as money Accounting for money is a routine activity, but accounting for time is not
The Mental Accounting of Time Cost
Key components of mental accounting model
Individuals track costs that are relevant to a particular expense and assign these costs to the relevant mental account.
The prospect theory value function dictates that the negative value of the cost displays diminishing marginal utility.
Expenses and funds are grouped into categories and spending is constrained by implicit & explicit budgets.
Researcher examined whether time investments follow these principles by 8 statement with time & monetary version
Traditional economic theories predict that people will consider the present and future cost and benefits when determining a course of action. Past costs should not be a factor.
Contrary to these predictions, people routinely consider historic, no recoverable costs when making decisions about the future. This behavior is called the sunk cost effect.
The sunk cost effect is an escalation of commitment and has been defined as the “greater tendency to continue an endeavor once an investment in money, time, or effect has been made.”
Sunk costs have two important dimensions:
Size (Monetary) and
Timing.
Consider the following two scenarios by exampleAfamilyhasticketstoabasketballgame,whichtheyhavebeenanticipatingforsometime.Theticketsareworth$40.Onthedayofthegame,abigsnowstormhitstheirarea.Althoughtheycanstillgotothegame,thesnowstormwillcauseahasslethatwillreducethepleasureofwatchingthegame.Isthefamilymorelikelytogotothegameiftheypurchasedtheticketsfor$40oriftheticketsweregiventothemforfree?The common belief is that the family is more likely to go to the game if they purchased the tickets. If the tickets been free, the account could be closed without a benefit or a cost
Sunk Cost Effect ----Will an individual exhibit a sunk cost effect if he or she had invested time (rather than money) in a endeavor?
Do individuals mentally account for time investments using the same principles as monetary investments?
Do they set budgets?
Time VS Money
Time can’t be inventoried or replaced Time is not as easily aggregated as money Accounting for money is a routine activity, but accounting for time is not
The Mental Accounting of Time Cost
Key components of mental accounting model
Individuals track costs that are relevant to a particular expense and assign these costs to the relevant mental account.
The prospect theory value function dictates that the negative value of the cost displays diminishing marginal utility.
Expenses and funds are grouped into categories and spending is constrained by implicit & explicit budgets.
Researcher examined whether time investments follow these principles by 8 statement with time & monetary version
The Mental Accounting of Sunk Time Costs: Why Time is not Like Money.
DilipSoman
Presenter: Soumitra Kundu
Mental accounting
An economic concept established by economist Richard Thaler(1980),
-which contends that individuals divide their current and future assets into separate, non-transferable portions.
The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.
Mental accounting
•Utility theory is a common currency theory
•All options are evaluated with respect to utility
•But all gains and losses are not viewed as the same.
–People seem to have a variety of mental accounts.
Imagine you are shopping for a calculator and a jacket, and you find them both at the same department store. The calculator costs $25, and the jacket costs $120. You are told that a store across town has both items, but the calculator is $15 cheaper at that store. Do you buy the items at that store or do you go across town.
Most people say yes. If the jacket is $15 cheaper, most people say no.
In each case, they have spent the same amount of money.
The idea is that people are creating separate mental accounts for different goals.
–Money for necessities
–Money for entertainment
–Spending money from one account does not affect others.
Imagine you have gone to the movies to see a show. You got to the front of the line and realized you lost $10, do you still go to the movie?
Most people say yes
Imagine you have gone to the movies to see a show. The ticket costs $10. You buy the ticket early in the day. When you get to the theater, you realize you lost the ticket. Do you buy another one? Most people say no.
Sunk Cost Effect
Traditional economic theories predict that people will consider the present and future cost and benefits when determining a course of action. Past costs should not be a factor.
Contrary to these predictions, people routinely consider historic, no recoverable costs when making decisions about the future. This behavior is called the sunk cost effect.
The sunk cost effect is an escalation of commitment and has been defined as the “greater tendency to continue an endeavor once an investment in money, time, or effect has been made.”
Sunk costs have two important dimensions:
Size (Monetary) and
Timing.
Consider the following two scenarios by exampleAfamilyhasticketstoabasketballgame,whichtheyhavebeenanticipatingforsometime.Theticketsareworth$40.Onthedayofthegame,abigsnowstormhitstheirarea.Althoughtheycanstillgotothegame,thesnowstormwillcauseahasslethatwillreducethepleasureofwatchingthegame.Isthefamilymorelikelytogotothegameiftheypurchasedtheticketsfor$40oriftheticketsweregiventothemforfree?The common belief is that the family is more likely to go to the game if they purchased the tickets. If the tickets been free, the account could be closed without a benefit or a cost
Sunk Cost Effect ----Will an individual exhibit a sunk cost effect if he or she had invested time (rather than money) in a endeavor?
Do individuals mentally account for time investments using the same principles as monetary investments?
Do they set budgets?
Time VS Money
Time can’t be inventoried or replaced Time is not as easily aggregated as money Accounting for money is a routine activity, but accounting for time is not
The Mental Accounting of Time Cost
Key components of mental accounting model
Individuals track costs that are relevant to a particular expense and assign these costs to the relevant mental account.
The prospect theory value function dictates that the negative value of the cost displays diminishing marginal utility.
Expenses and funds are grouped into categories and spending is constrained by implicit & explicit budgets.
Researcher examined whether time investments follow these principles by 8 statement with time & monetary version
The Mental Accounting of Sunk Time Costs: Why Time is not Like Money.
DilipSoman
Presenter: Soumitra Kundu
Mental accounting
An economic concept established by economist Richard Thaler(1980),
-which contends that individuals divide their current and future assets into separate, non-transferable portions.
The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.
Mental accounting
•Utility theory is a common currency theory
•All options are evaluated with respect to utility
•But all gains and losses are not viewed as the same.
–People seem to have a variety of mental accounts.
Imagine you are shopping for a calculator and a jacket, and you find them both at the same department store. The calculator costs $25, and the jacket costs $120. You are told that a store across town has both items, but the calculator is $15 cheaper at that store. Do you buy the items at that store or do you go across town.
Most people say yes. If the jacket is $15 cheaper, most people say no.
In each case, they have spent the same amount of money.
The idea is that people are creating separate mental accounts for different goals.
–Money for necessities
–Money for entertainment
–Spending money from one account does not affect others.
Imagine you have gone to the movies to see a show. You got to the front of the line and realized you lost $10, do you still go to the movie?
Most people say yes
Imagine you have gone to the movies to see a show. The ticket costs $10. You buy the ticket early in the day. When you get to the theater, you realize you lost the ticket. Do you buy another one? Most people say no.
Sunk Cost Effect
Traditional economic theories predict that people will consider the present and future cost and benefits when determining a course of action. Past costs should not be a factor.
Contrary to these predictions, people routinely consider historic, no recoverable costs when making decisions about the future. This behavior is called the sunk cost effect.
The sunk cost effect is an escalation of commitment and has been defined as the “greater tendency to continue an endeavor once an investment in money, time, or effect has been made.”
Sunk costs have two important dimensions:
Size (Monetary) and
Timing.
Consider the following two scenarios by exampleAfamilyhasticketstoabasketballgame,whichtheyhavebeenanticipatingforsometime.Theticketsareworth$40.Onthedayofthegame,abigsnowstormhitstheirarea.Althoughtheycanstillgotothegame,thesnowstormwillcauseahasslethatwillreducethepleasureofwatchingthegame.Isthefamilymorelikelytogotothegameiftheypurchasedtheticketsfor$40oriftheticketsweregiventothemforfree?The common belief is that the family is more likely to go to the game if they purchased the tickets. If the tickets been free, the account could be closed without a benefit or a cost
Sunk Cost Effect ----Will an individual exhibit a sunk cost effect if he or she had invested time (rather than money) in a endeavor?
Do individuals mentally account for time investments using the same principles as monetary investments?
Do they set budgets?
Time VS Money
Time can’t be inventoried or replaced Time is not as easily aggregated as money Accounting for money is a routine activity, but accounting for time is not
The Mental Accounting of Time Cost
Key components of mental accounting model
Individuals track costs that are relevant to a particular expense and assign these costs to the relevant mental account.
The prospect theory value function dictates that the negative value of the cost displays diminishing marginal utility.
Expenses and funds are grouped into categories and spending is constrained by implicit & explicit budgets.
Researcher examined whether time investments follow these principles by 8 statement with time & monetary version
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