Explain with examples of the theory of "mental accounting" brought by the winner of the Nobel Prize in Economics

Suppose you decided to invite a friend to watch a movie in the cinema together, and the cost per ticket was 10 riyals, so you would pay 20 riyals for the two tickets. But once you took your place in the queue at the box office and took your wallet out of your pocket you found out you lost 20 riyals. In this case, would you still like to access that movie?

This question is similar to that of two American psychologists in 1984 to 200 participants in one experiment. The result was that 54% of respondents said they would not buy tickets, preferring to leave, while 46% said they still wanted to buy tickets.

But what if we changed a bit in this scenario. Once again, I decided to invite your friend to watch the movie together, and I bought the two tickets for 20 riyals that morning, and when I arrived at the room in the evening I discovered that you lost the tickets. In this case, would you still like to access that movie?

What happens in a situation like this is that about 88% of people decide to buy new tickets, while only 12% prefer to go home without watching the movie.

This seems at first glance mad, why do people behave differently in both situations even though the final outcome is mathematically identical in both cases? In the end, this person has two tickets for 20 riyals, and his money has dropped 40 riyals compared to the beginning of the day.

Why do people behave this way?

The difference in both cases is due to a psychological phenomenon called "mental accounting", coined by Richard Thaler, a professor of economics at the University of Chicago who announced his Nobel Prize in Economics last Monday. His ideas inspired many scientists in different disciplines How we think about human behavior.

This phenomenon affects how people spend and save their money, how they deal with unexpected losses, how people make their financial decisions by creating separate mental accounts in their minds for the same type of resources, and how their psychological feeling about that resource prevents them from focusing on the final outcome Of their decisions.

• This theory explains the secret of ignoring the majority in the previous experience of money lost, which they did not do with the lost tickets, although the value of the missing in one case, namely 20 riyals.

• Simply what happened is that this person has a mental account in the head called for example "entertainment account". The loss of tickets and the need to buy others reduce the balance of "entertainment account" for 40 riyals, while he was planning to spend only 20 riyals.

• The lost money is not loaded on the "entertainment account" and that is why most people do not hesitate to buy new tickets after losing part of their money.

• In fact, "mental accounting" is a problem suffered by the vast majority of people. Try to think about the following example: A relative gives you 100 riyals for example on Eid, and although he did not tell you to use it to pay your electricity bill, the 100 riyals in the end is 100 riyals, and the abstract logic says you should spend this amount in paying the value That bill, but you do not, because of the problem of "mental accounting", where your mind puts these funds in a mental account other than the one that puts the confusion you receive at the end of each month.

Question Million Dollar .. Why pay the subscription of Jim and we never go?

• In this regard too, Thaler has done a lot of research that shows how bad human beings are in long-term financial planning, in which he pointed out that each individual has two fundamental aspects in his personality. The first aspect is the scheme, the other who goes on his way indifferently.

• The planned aspect of your personality, sees that paying the annual gym subscription is a perfect decision and makes you feel that you have to go to the gym every day to get a more fit body.

• But the random side of you prevents the plan from going this way, and justifies the frequent and constant absence from going to the gym or postpone it to a more appropriate time, often does not come until the end of the year, and comes back planned side of your personality to convince you to pay the value of the subscription, And that this year is different from the previous one.

• This is how the gymnasium reaps its money. They simply focus their ads on the planned side call of your character. Therefore you need to understand both sides in order to go your plans as you wish.

• Economics has long distinguished itself from other disciplines by believing that most if not all human behavior can be easily explained by the assumption that our preferences as human beings are specific and stable over time, and also rational.

• But Thaler came in the 1990s and began to challenge this view through his writings on anomalies in human behavior that can not be explained by standard economic theory.

Batch theory

These psychological ideas also play an important role in the theory of Nudge theory - another concept developed by Thaler - in which small stimuli are provided to indirectly influence people's behavior in an attempt to achieve non-coercive compliance with a particular policy.

• A few years ago, GE's board of directors wanted to address the smoking problem, believing it had adversely affected employees. So, in collaboration with a professor of medicine at the University of Pennsylvania, Kevin Volpe, conducted a randomized trial, during which each employee was given $ 250 if he stopped smoking for 6 months and $ 400 if he stopped for 12 months. Another group was ordered to stop smoking and received no incentives.

• The researchers found that the groups that received the incentives the success rate of their members in quitting smoking was nearly three times that of the group that was not given any incentives, and that the effect continued even after the cessation of incentives after 12 months. Based on these results, GE changed its policy and began using this approach in dealing with its 152,000 employees.

In the United Kingdom, in order to address the problem of low participation of private sector workers in pension programs, the British Government directed employers to introduce the "automatic registration" system in 2012.

• This means that all employees will be automatically included in their company's pension scheme, and the subscription value will be deducted from their salaries unless they are formally requested to be exempted.

• The idea was that many people already wanted to save a larger part of their money for retirement, but they were delaying it because they were concerned that they might now need other funds. So a "push" was needed.

• Since the British government adopted this system, the number of active members of private pension schemes has increased from 2.7 million employees five years ago to 7.7 million in 2017.

• Many governments around the world alongside the British, American and German have used the Nudge theory to study human behavior in many areas to make human choices and guide them in a way that serves the economy and in turn improved government services provided.