Mental accounting: The framing of (ir)rational economic decisions

Abstract

Predicting the behaviour of market participants is one of the main goals of standard economic theory which rely on the assumption that people are rational. As market participants do not always behave in accordance with these theoretical assumptions, a new approach to this goal was offered by behavioural economics. This discipline recognizes human flaws, shortcomings and limited rationality. The growing importance of this discipline, recently awarded with Nobel Prize, provided the motivation for writing this paper, which focuses on a specific area of behavioural economics known as mental accounting. Mental accounting studies economic decision-making, the perception of gains and losses, spending and saving preferences and risk aversion, from the perspective of human irrationality. The purpose of this paper is to gather information on the mentioned aspects of mental accounting. Hypothetical scenarios in a highly structured questionnaire were presented to 290 respondents from five Slavonian counties in Eastern Croatia. The survey sample comprised mainly students and young employed individuals pursuing studies/career in economics or other professions. The results are analysed using a basic statistical analysis and a comparative analysis to compare the results to those obtained in major past studies such as the ones conducted by the Nobel laureate Thaler. The results of the survey are largely consistent with previous findings. No significant differences were found between sample subgroups, i.e. students compared to employed individuals and economic professions compared to other professions. The existence and application of mental accounting in everyday economic decision-making have been confirmed. Interestingly, a strong tendency towards irrational behaviour was found in economists as well.