Valores éticos y morales

The concept of mental accounting (Thaler, 1985) has to do predominantly with framing. Decision makers mentally ‘frame’ their money, resources, problems, transactions, to mention a few, such as to derive what they perceive as maximum level of satisfaction or utility, or the minimization of loss. Research shows that decision makers tend to mentally segregate or compartmentalize items, resources, or money based on pre-defined categories such as the use of such items or its purpose. For example, money could be spread across several types of mental accounts such that money in one account cannot be substituted for that in the other. A decision maker could have numerous mental accounts for the uses of money such as groceries, entertainment, or transportation. Based on these compartmentalizing, a consumer may spend £30 on tickets to a concert when the money is taken out of the groceries account and not the entertainment account. Mental accounting violates the normative economic principle of fungibility which implies ease of transferability or substitutability of one thing for another.

Thaler (1985) applied Kahneman and Tversky’s (1979) value function to mental accounting to describe how decision makers code or perceive outcomes involving gains and losses in decision making. Thaler’s MAPs were made possible by introducing price as an attribute into the value function. Where price becomes the reference point, it serves the same function as reference price. As it applies to consumer choice, decision problems are perceived in terms of monetary gains and losses relative to a reference point. He described decision makers as pleasure seekers who tend to look for the best ways to combine their activities to generate the most happiness. Working with joint outcomes, x and y, he came up with four principles with which a decision maker with a value function would code or frame combinations of x and y to get maximum utility/value. These have come to be known generally in literature as mental accounting principles (MAPs).

21 2.5 THE FRAMING OF OUTCOMES

Outcomes are the end result of any action. Thaler (1985) applied the concept of mental accounting to consumer choice to investigate how decision makers code their monetary gains and losses. He applied the value function to joint or combined outcomes and by extending the reference point characteristic of the value function to include price, he proposed four ways decision makers prefer to frame combinations of outcomes. These are known as mental accounting principles (hereafter, MAPs).

According to Thaler (1985) a decision maker faced with two joint outcomes ‘x’ and ‘y’ would choose combinations of x and y that provides the highest level of utility. Such an individual then has to choose between a joint evaluation of x and y given as v (x + y) and a separate evaluation given as v (x) + v (y). In the first alternative where the outcomes are jointly evaluated, such an individual is said to have integrated outcomes and in the second option, the outcomes are said to be segregated.

Given the preceding, Thaler’s (Ibid.) are derived as follows:

a) A multiple monetary gain is where x>0 and y>0. These would be combined such that v (x) + v (y) > v (x + y). Faced with such an outcome, an individual will prefer to segregate multiple gains.

b) A multiple monetary loss involves 2 outcomes –x and –y, where – x>0 and – y>0 (- x and –y both remain positive)5, and would be combined as v (-x) + v (-y) < v {- (x + y)}. Here, integration of losses will be preferred since the utility derived is greater.

c) A mixed gain given as x and –y such that x > y. This would be coded as a net gain and combined such that v (x) + v (-y) < v (x - y) and integration is the preferred choice.

d) A mixed loss given as x and –y with x < y. This is coded as a net loss. Where the loss is larger than the gain, the outcomes will be combined such that v (x) > v (x – y) – v (–y) and the choice will be to segregate. Thaler (1985) termed this ‘the silver lining principle’. However, where the loss is small relative to the gain (e.g. £30, – £40), then the decision maker would prefer integration because gaining £30 will be valued less than having the loss reduced from £40 to £10 since the loss is almost cancelled out by the gain.

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This description of monetary loss is not considered in terms of negative prices. Rather, in terms of negative monetary deviations from a specific reference point. For example, a 5% decrease in one’s annual income following a bad economy will be considered as a loss in comparison with the previous income.

22 Figures 2.4a and 2.4b further illustrate the preferences to integrate or segregate mixed losses. Figure 2.4a shows the preference for integration when the loss is small relative to the gain. However, where the loss is larger than the gain, segregation will be preferred as shown in figure 2.4b.

In summary, Thaler's (Ibid.) mental accounting principles (MAPs) are:

a) Multiple Gains (2 gains of same or different magnitudes) should be segregated. b) Multiple Losses (2 losses of same or different magnitudes) should be integrated. c) Mixed Gains (a large gain + a small loss) should be integrated.

d) Mixed Losses (a large loss + a small gain) should be segregated.

Figure 2.4a

The value function indicating preference for integration of mixed losses.

23 Figure 2.4b

The value function indicating preference for segregation of mixed losses (silver lining)

Source: Thaler (1985, p. 203)

To summarize our presentation so far, we have looked at reference prices, prospect theory’s value function, reference dependence, and mental accounting principles. There have been numerous studies on consumers’ perceptions of gains and losses in decision scenarios involving risk using Kahneman and Tversky’s (1979) prospect theory as a foundation. This is due mainly to the close link between prospect theory and decision frames. Building on prospect theory and the associated literature presented in this current chapter, the goal of this thesis is to present an empirical analysis of the way consumers evaluate reference prices in relation to their purchase decisions in the absence of risk. More specifically, we examine the impact of both internal and external reference prices on decision makers’ perception of monetary gains and losses in riskless choice. Internal and external reference prices serve as our reference points.

In the next section we look at the last stream of literature – framing effect, and examine how it relates to prospect theory.

24 2.6 FRAMING EFFECT

The term ‘Framing Effect’ or equivalency (see Tversky and Kahneman, 1986) is attributed to Tversky and Kahneman (1981). It refers to the general tendency for decision makers to change their choice preferences based on the description of decision scenarios. There has been considerable research interest in understanding framing effects because it indicates that slight differences in the way decisions, events or outcomes are presented could affect the final choices that decision makers take. Kahneman and Tversky (1984) suggest that framing effect is evidence of irrationality in individuals’ decision making because it violates the normative principle of invariance which states that one's decision should be independent of the particular way a problem or situation is described.

In literature, framing effect has been portrayed in two ways. The first deals with the same re-descriptions of pairs of problems and the second to different descriptions of pairs of problems that are economically equivalent. The following example from Tversky and Kahneman (1981) is regarded as a classic in studies on framing effect and it illustrates the second way framing effect has been presented in literature.

Problem 1: You pay $10 for a ticket to see a play. When you get to the theatre, you