Thursday, October 16, 2014 12:00:52 PM
Mental Accounting
Humans have a tendency to place particular events into mental compartments, and the difference between these compartments sometimes impacts our behavior more than the events themselves.
Say, for example, you aim to catch a show at the local theater, and tickets are $20 each. When you get there you realize you've lost a $20 bill. Do you buy a $20 ticket for the show anyway? Behavior finance has found that roughly 88% of people in this situation would do so. Now, let's say you paid for the $20 ticket in advance. When you arrive at the door, you realize your ticket is at home. Would you pay $20 to purchase another? Only 40% of respondents would buy another. Notice, however, that in both scenarios you're out $40: different scenarios, same amount of money, different mental compartments. Pretty silly, huh?
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