Mental Accounting

July 24, 2007

A post at digital audio insider brought me to a very interesting concept that – maybe – can explain a part of the changing consumer behavior in the “digital age”: Mental Accounting .
Wikipedia: “A concept first named by Richard Thaler (1980, University of Chicago). Mental accounting attempts to describe the process whereby people code, categorise and evaluate economic outcomes. Mental accounting theorists argue that people group their assets into a number of non-fungible mental accounts.”

This Washington Post article gives a good overview and a few examples for mental accounting.

“Here is the simplest definition of mental accounting: People carry around different running tabs in their heads. You have, for example, an “entertainment account.” Losing a movie ticket and having to buy a second one takes $20 out of your entertainment account when you planned to take only $10. Lost cash, on the other hand, is not charged to the entertainment account — which is why most people don’t hesitate to buy a movie ticket after they lose some cash.”

“It affects how people spend money and how they save. It influences how people deal with losses and windfall gains. It tells us what to do as we weigh different kinds of payment plans for a luxury item. The effects of mental accounting are felt in domains that seem far removed from the conventional understanding of economics.”

The value of ubiquitous digital content like music declines. Thats obvious and simply the law of supply and demand. But the rising gross income in the area of live entertainment, for example in the music business, where people nowadays pay incredible high prices for concert tickets, surprises.
The benefit for customers visiting a concert is nowadays nearly the same than 15 years ago. The scarcity of tickets is not changing over the years and the venues are not much bigger than years ago. So why do the music fans accept these high ticket prices in the last few years?
Mental Accounting can be one explanation. The people have someting like a “entertainment” or “music account”. In the “digital age” they save a lot of money in the area of “recorded music”, so they are able to consume more music and shift the budget to live music and accept the higher prices for a concert ticket. Although they could use the saved money for other things, they don`t, at least not all of it, cause it’s money of the “music account”.

Does that make  sense?
It sounds so simple…
I will try to read more about mental accounting in the next weeks.


One Response to “Mental Accounting”

  1. […] personally I think that there is something like “Mental Accounting“, people have something like a imaginary “music budget”, a budget for there […]

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