Correlation Between Anomalies and Theories of Mental Accounting

Manel Baucells
Wednesday, June 17, 2015 - 14:00
RTH 306

Several consumer choice models account for anomalies in consumption-payment decisions. We consider four such models, including Prelec and Loewenstein 1998 double-entry model and Koszegi and Rabin 2006 reference dependent model. We observe that these models make distinct predictions regarding how different anomalies ought to be related or unrelated. In a controlled experiment we elicit the participant's tendency towards five anomalies, namely, the sunk-cost effect, the reluctance to trade, the flat-rate bias, the preference for pre-pay, and the preference to be post-paid. The observed correlation between anomalies across individuals is consistent with the prediction of Baucells and Hwang 2014 model and, to a large extent, with that of Prelec and Loewenstein 1998. The evidence is partially consistent with Thaler 1985, and we find little support for Koszegi and Rabin 2006. The results suggest that the speed of adaptation of reference prices to current price information is a key explanatory factor.

Bio: Manel Baucells is Senior Economist at the USC Center for Economic and Social Research. Previously he was Senior Economist at the Rand Corporation (California), and full professor at the University Pompeu Fabra (Barcelona). He completed his Ph.D. on game theory, with applications to management, at the University of California, Los Angeles (UCLA) under the supervision of Steven Lippman and Lloyd Shapley (2012 Nobel Prize laureate in Economics).

His research focuses on incorporating psychological realism into economic models by considering factors such as reference point formation, mental accounting, non-linear risk and time distance and satiation. He is department editor in the journal Management Science and associate editor of Operations Research.

Manel and Rakesh Sarin (UCLA) have published the book Engineering Happiness (UC Press), that has received the 2014 best publication award by the Decision Analysis society. The book applies principles of behavioral economics to improve life outcomes.

Selected publications:

Baucells, Manel and Franz Heukamp (2012). Probability and Time Trade-off. Management Science, 58(4), 831-842.

Baucells, M., Martin Weber, and Frank Welfens (2011). Reference - Point Formation and Updating. Management Science, 57(3), 506-519.

Baucells, Manel and Lloyd S. Shapley (2008). Multiperson Utility. Games and Economic Behavior, 62, 329-347.