Mental Accounting, Utility, Value and Transaction
In mental accounting theory, framing means that the way a person subjectively frames a transaction in their mind will determine the utility they receive or expect. This concept is similarly used in prospect theory, and many mental accounting theorists adopt that theory as the value function in their analysis.
Another very important concept used to understand mental accounting is that of modified utility function. There are two values attached to any transaction - acquisition value and transaction value. Acquisition value is the money that one is ready to part with for physically acquiring some good. Transaction value is the value one attaches to having a good deal. If the price that one is paying is equal to the mental reference price for the good, the transaction value is zero. If the price is lower than the reference price, the transaction utility is positive.
Read more about this topic: Mental Accounting
Famous quotes containing the word mental:
“The very hope of experimental philosophy, its expectation of constructing the sciences into a true philosophy of nature, is based on induction, or, if you please, the a priori presumption, that physical causation is universal; that the constitution of nature is written in its actual manifestations, and needs only to be deciphered by experimental and inductive research; that it is not a latent invisible writing, to be brought out by the magic of mental anticipation or metaphysical mediation.”
—Chauncey Wright (1830–1875)