My mommy econo-mest!

In a scarcity "economy," the monthly non-vegetarian chicken curry was welcomed with great relish by all of us in the family. The smell of masala chicken cooking in the BIG Hawkins pressure cooker sent us (bro, sis and myself) into a tizzy. While the others would be watching Sunday Mahabharat I would sneak into the kitchen and gobble a spoonful of curry and rush back into the drawing room lest the family missed my presence.

But come lunchtime and the contents of the BIG Hawkins pressure cooker would be emptied into small bowls, kind of earmarked, for lunch today; dinner today; and lunch tomorrow. Often I wondered why mommy would go to such length to stuff the curry into separate bowls. Just because the bowl had lesser contents would we really reduce our consumption accordingly! Did it really matter so much?

Well, it does!

Here is another interesting example to drive the point home.

Imagine that you are about to purchase a jacket for ($125) and a calculator for ($15). The calculator salesman informs you that the calculator you wish to buy is on sale for ($10) at the other branch of the store, located 20 minutes drive away. Would you make the trip to the other store?

Note your answer and as well the general reaction of people.

Again, Imagine that you are about to purchase a jacket for [$15] and a calculator for [$125]. The calculator salesman informs you that the calculator you wish to buy is on sale for [$120] at the other branch of the store, located 20 minutes drive away. Would you make the trip to the other store?

Discounting the framing effect of the question in this blog setting, most people would travel to save in the first example but not in the second.

Have you often wondered why goods are marked "sale" rather than just displaying it as a reduced price good? Again, if you use a credit card, would you prefer paying for the purchase on the spot in cash or at a later date. Credit card companies make a huge deal because of the fact that your mental account often fails to register the true impact of that financial transaction. You can compare a single purchase of a Rs 100 item to a the addition of a purchase of Rs 100 on a Rs 1000 bill.

My mommy did not know it but she was using some of the fundae of mental accounting to economise. And companies are using the same knowledge of behavioral finance to boost consumer spending. For a user-friendly version of knowing more about how we really spend click here. Nothing like an alert consumer in the market!

If you want a research paper on it, read Thaler's Mental Accounting Matters. Quite readable, in fact. Most of the examples above have been borrowed from it!