The mental calculation which the consumer does by comparing not just the price but the utility and the source of the money before making any purchase can be called as mental accounting. (Grinblatt, 2001).
An intelligent marketing technique that maximizes its profits by harping on the cognitive accounting of all individuals is by maintaining an entire range of sizes of products or garments. A 50 ml bottle of shampoo of some popular brand for $20 might seem unnecessary but at the same time a smaller bottle of the same brand available at a lesser price will be quickly picked up by the customer. (Stein, 2003)
The best way to avoid the pit falls laid out by the smart marketing of the companies is to understand the value which the product will add to our lives, if the product does not seem to add any value then the buying is not necessary. (Morck, 2000)
The casinos basically thrive on the concept of mental accounting. A person gets huge returns and the smart employees of casino keep motivating people to invest more money and to take back huge returns home. (Stein, 2003)But in most of the cases what happens eventually is that people get so obsessed with winning that ‘uncertain huge amount’ that they are unable to concentrate on the ‘certain amount’ which they have in hand. (Grinblatt, 2001)However if they were to part with that kind of money from their salary, they would obviously never take such a decision.
Grinblatt, M. (2001) “The disposition effect and momentum”. University of California, Los Angeles.
Stein, J. (2003), “Differences of opinion, short-sale constraints and market crashes”. Review of Financial Studies 16:487−525
Stulz, R. (1996), “Timing, investment opportunities, managerial discretion, and the security issue decision”. Journal of Financial Economics 42:159−185
Morck, R. (2000) “Demand curves for stocks do slope down: new evidence from an index weights adjustment”. Journal of Finance 55:893−912.
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