On the Role of Similarity in Mental Accounting and Hedonic Editing

Abstract

The theory of mental accounting is often used to understand how people evaluate multiple outcomes or events. However, a model predicting which outcomes are associated with the same mental account and evaluated jointly, versus different accounts and evaluated separately, has remained elusive. We develop a framework that incorporates an online, bottom-up process of similarity and categorization into mental accounting operations. In this categorization-based model of mental accounting, outcomes that overlap on salient attributes are automatically categorized and assigned to the same mental account while outcomes that do not overlap on salient attributes are assigned to different accounts. We use this model to derive the hedonic accounting hypothesis, which generates testable behavioral predictions on people’s preferences over the timing of outcomes given similarity-based constraints on mental accounting operations. Six studies provide support for the predictions: People prefer to experience similar losses close together in time and spread dissimilar losses apart; the reverse is true for gains, with a preference for dissimilar gains close together in time and similar gains spread apart across time. Importantly, our model is able to rationalize prior evidence that has found only limited support for the predictions of mental accounting and hedonic editing. Once the psychological process of similarity and categorization is explicitly incorporated into a formal model of mental accounting, its predictions are supported by the data.

Keywords: Mental Accounting, Hedonic Editing, Similarity, Categorization, Prospect theory, Intertemporal preferences

JEL Classification: D99