A loss booking theory of mental budgeting
Embargo Date
2025-05-31
OA Version
Citation
Abstract
Mental budgeting occurs when consumers allocate money to mental accounts to appropriate it for specific expenses or expense categories. Mental budgeting creates anomalies in consumer spending. Once money is budgeted, consumers spend that money as if it is no longer perfectly fungible, or substitutable, with other money. I propose a loss booking theory of the psychological mechanisms involved in mental budgeting. It explains the way mental budgeting changes how spending is perceived, experienced, and initiated. I suggest that the loss of money is psychologically “booked” or realized when it is budgeted into mental accounts. This shifts the reference point from which expenditures of budgeted money are evaluated. Expenditures of budgeted money are less likely to be coded as losses and elicit less pain of paying than expenditures of unbudgeted money or money budgeted toward other expense categories. This theory provides an empirically supported integrative account of mental budgeting and its anomalous effects on consumer spending. Furthermore, it makes the prediction that mental budgeting increases consumer spending. The results of thirteen experiments provide evidentiary support for the predictions of my theory across a variety of expense categories, from clothing to consumer electronics to real holiday shopping. These findings yield valuable insights into the psychological mechanisms of mental budgeting, mental accounting processes, and a variety of anomalies in consumer financial decision-making.
Description
License
Attribution-NonCommercial-NoDerivatives 4.0 International