Experts Address Series 2016-17 (05 July 2017)
Jun, 13 2017
By Programme Office
Speaker: Professor Alan Montgomery
Associate Professor of Marketing at the Tepper School of Business, Carnegie Mellon University
Visiting Professor, Department of Computer Science, HKU
Abstract: A large and growing body of research shows that consumers' often develop "mental accounts" that correspond to personal financial categories they consider relevant, but which do not correspond to actual financial accounts. These mental accounts can explain what may seem like irrational behavior to economists, such as having both large savings balances with little interest earnings and large credit card balances with high interest costs, or why consumers spend more when they use credit cards than cash or debit cards. Consumers internally use these mental accounts is to better manage their finances, but the mental accounting process often reduces fungibility and leads consumers to be inefficient, or even suboptimal, in the way they invest their time and money. Our study develops an econometric model that estimates mental accounting using financial transactional data. We find that consumers fall more towards bounded models that incorporate mental accounting than unbounded rational economic models. We conclude with potential consequences for innovations on consumer financial services.
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