MENTAL ACCOUNTING

Inés Arestoff Rumayor, Hanna Bach, Federico Louvin,

Álvaro Pensado Fernández

Tutor: Thomas Meissner

Course: Behavioral Economics
Tutorial Group: 2
Group Project
 Mental Accounting

Executive Summary
According to the dictionary mental accounting is defined as “the system of recording and
summarizing business and financial transactions in books, and analyzing, verifying, and
reporting the results”. But we can also define it as the method that people use to keep track of
their money (where it is going) and to keep track of their expenditures, as well as what to do
with their money.
 
Firstly, Thaler (2004) analyses how people perceive and evaluate outcomes and based on
their experience how they make choices. Here, the value function plays an important role
describing a frame of evaluation about how the events are perceived and coded in order to
make decisions. As to maximize psychological pleasures and avoid pain we evaluate
outcomes based on utility maximization using the method of hedonic framing. From it we
know that people combine losses because it diminishes their marginal impact. This, of course,
depends on how people perceive the risk. Once a buyer decides to purchase, the consumer
obtains two types of utilities from their purchase: the acquisition utility and transaction
utility. The former measures the value of the good obtained relative to its price, while the
latter, which is more important here, measures the perceived value of the “deal”. 

Secondly, activities are assigned to specific accounts. That is, categorization or labeling of
money into budgets, wealth into accounts, and income into categories. There are two
purposes of categorizing spending into budgets: to simplify making rational trade-offs and to
help self-controlling these trade-offs. The allocation of budgets into mental accounts can
result in them being not interchangeable. Consequently, this can influence the consumption.
Because expenditures are grouped into budgets, it may occur that one budget has been
exhausted while the other´s funds are still remaining. A simple way to deal with self-control
problems is to separate funds into different accounts. For instance, here we can find that cash
is in the “current assets” category being routinely spent. On the other hand, “future income”,
which is the less tempting category, as it is money that will be earned in a future. This
describes the Behavioral Life-Cycle model, that predicts that “if funds can be transferred to
less tempting mental accounts, they are more likely to be saved” (Thaler, 2004).
 
Finally, the evaluation of these accounts, i.e. the way in which boundaries are set. The
analysis implies that the choices made can be affected by the outcome of a gamble if a series

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of gambles are bracketed together. We can then affirm that money that is won today is treated
differently in the framework of mental accounting than money won yesterday. How to
bracket the different gambles changes and influences the attractiveness of the bets. Loss
averse people are usually willing to take risks when combining more than one bet than if they
just consider one at a time. Diversification bias demonstrates the important role of bracketing.

Solution of Section C (Questions and Discussion Items)

1. What are the Building Blocks of Mental Accounting?
Mental accounting consists of mainly three building blocks. Firstly, it tackles the way
decisions are made as well as how they are evaluated. Moreover, it takes into account how
outcomes are perceived and experienced. Secondly, mental accounting incorporates the
method of assigning certain activities to specific mental accounts. The grouping of
expenditures into categories and labeling funds as either stocks or flows further illustrate the
second building block. Lastly, “choice bracketing” concerns the frequency to which mental
accounts are assessed. For instance, mental accounts can be evaluated on a daily, weekly,
monthly or yearly basis.

2. The Value Function

2.1 What are the three essential elements of the value function?

(Adapted from Thaler, 2004)

a. The value function is defined over gains and losses relative to some reference point.
The focus on changes, rather than wealth levels as in expected utility theory, reflects
the piecemeal nature of mental accounting. Transactions are often evaluated one at a
time, rather than in conjunction with everything else.
b. Both the gain and loss functions display diminishing sensitivity. That is, the gain
function is concave, and the loss function is convex. This feature reflects the basic
psychophysical principle (the Weber-Fechner law) that the difference between $10
and $20 seems bigger than the difference between $1000 and $1010, irrespective of
the sign.

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c. Loss-aversion. Losing $100 hurts more than gaining $100 yields pleasure: v(x)< -v(-
x).

2.2 Example of a Value Function

√ x if x >0
v ( x )= {
−2 √−x if x< 0

2.3 Graphing the Value Function

(Graphed with Geogebra)

3. Numerical rebate example (Thaler, p. 80)

Testing the hedonic editing hypothesis:

Choosing between a gain of $30 followed by a loss of $9. The question is whether subjects
prefer experiencing the gain and loss on the same day ( v( x+ y ) where x=30 and y=−9) or
they prefer the gain and loss on separate days (v ( x ) +v ( y )).

v ( x + y )=√ 30−9=4.58
v ( x ) +v ( y )=√ 30+ (−2 √ −(−9 ) )=−0.52
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In this case, given our value function from above, the subjects should prefer experiencing the
gain and loss on the same day as the utility (4.58) is greater than the utility (-0.52) of
experiencing the gain and loss on two separate days. This is in line with the principles of
hedonic framing: subjects integrate small losses (-9) because the loss function is convex.

4. Calculating the choices from Thaler, p. 94

The numbers in bold print indicate the higher utility and thus, should correspond to the
preferred choice.

Problem 1:
Reference point = 30 (current state)
(a) v ( x )=0.5 √ 9+0.5 (−2 √ 9 ) + √ 30=3.98
(b) v ( x )=√ 30=5.44
Reference point = 0 (prior to current state)
(a) v ( x )=0.5 √ 39+0.5 √ 21=5.41
(b) v ( x )=√ 30=5.44

Even though option b) gives a higher utility in both cases, the majority (70 percent) of
subjects chose option a). Choosing option a) is in line with the so-called “house money”
effect, which induces people, who experienced a prior gain, to consequently be risk seeking.
It is also noteworthy, comparing reference point of zero and 30, subjects obtain a
substantially higher utility when choosing option a) when the reference point is 0. In this
case, the house money effect contradicts what a rational person with the given value function
would do.

Problem 2:
Reference point = -30 (current state)
(a) v ( x )=0.5 √ 9+0.5 (−2 √ 9 ) + (−2 √ 30 )=−12.45
(b) v ( x )=−2 √ 30=−10.95
Reference point = 0 (prior to current state)

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(a) v ( x )=0.5 (−2 √ 21 ) +0.5 (−2 √ 39 ) =−10.83

(b) v ( x )=−2 √ 30=−10.95

Looking at the reference point = -30, it is clear the subjects would choose option b). This is in
line with what the majority of subjects chose in the experiment (60 percent). Accordingly,
subjects who have experienced a prior loss, are less willing to endure the possibility of further
gains or loss. Hence, they become somewhat risk averse. However, as the results when taking
the reference point of zero show, the utility is maximized for option a). Thus, when the losses
(-21 and -39) are bracketed together, the subject should choose the gamble. Yet, this result
with the given value function, contradicts what the majority of subjects chose (60 percent
chose option b)).

Problem 3:
Reference point = -30 (current state)
(a) v ( x )=0.67 (−2 √ 30 ) +0.33 √ 30=−5.33
(b) v ( x )=−2 √ 30+ √ 10=−7.79
Reference point = 0 (prior to current state)
(a) v ( x )=0.67 (−2 √ 30 ) +0.33 √ 0=−7.33
(b) v ( x )=−2 √ 20=−8.44

Taking both reference points into account it becomes clear that the prior loss of $30 induces
risk seeking behavior if there is a possibility of breaking even. This is in line with what the
majority of subjects chose: 60 percent chose option a).

5. Examples of Mental Accounting Behavior – Discussion

The Framing of Gains and Losses

The first concern of mental accounting theory is how to value gains and losses; it is the
process of coding, categorizing, and evaluating events (Thaler, 2004). Mental accounting is
topical, which means that the prospects are evaluated based on a reference level which is
determined by the context within which the decision arises (Thaler, 2004). Therefore, in the
example of whether to drive 20 minutes across town to save $5 on a calculator, such decision
frames are seen when groups of people choose differently based on the cost of the calculator.

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For example, when it costs $15, a $5 discount is highly significant, and people will choose to
drive the 20 minutes. When it costs $125, saving $5 is not as attractive anymore (the
reference point here is much higher than the expected savings), and therefore people will
choose not to drive. As Thaler (2004) puts it, the way a decision is framed will alter choices
in the real world because people make decisions piecemeal, influenced by the context of the
choice.

This example also brings up the hedonic framing hypothesis, i.e. the way of evaluating joint
outcomes to maximize utility:
 Segregate gains;
 Integrate losses;
 Integrate smaller losses with larger gains;
 Segregate small gains from larger losses.
These principles represent how people would prefer to have their outcomes framed. However,
they often fail to edit them accordingly. “For gains, the hedonic editing hypothesis was
supported. A large majority of subjects thought temporal separation of gains produced more
happiness. But, in contrast to the hedonic editing hypothesis, subjects thought separating
losses was also a good idea” (Thaler, 2004). Mental accounting is expected to be as
hedonically efficient as possible, and loss aversion is more important than shown on the
prospect theory value function, as it is difficult to combine losses to diminish their impact.

Mental Accounting Decision-Making

Next on Thaler’s (2004) list is mental accounting decision-making. He proposes the theory of
transaction utility, which is defined as the difference between the amount paid and the
‘reference price’ for the good (the regular price that the consumer expects to pay for this
product) (Thaler, 2004). This is present in the example of the beer at the beach: subjects of
this experiment expect the beer to cost more when bought from a fancy resort hotel, and cost
less when bought from a small, run-down grocery store. This is because the reference price in
the context of a fancy hotel is higher than that of a small grocery store.

Thaler (2004) also writes about the decision of opening and closing mental accounts based on
the intuition that “a realized loss is more painful than a paper loss”. In the example of
someone buying shares of stock, mental accounting favors selling the ones which are
performing well and increasing in price, whereas a rational analysis favors selling the ones
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which are performing badly. In addition, Thaler (2004) predicts that, when a purchase is
made in advance of consumption, people will close mental accounts when they have a
positive balance. If the accounts have a negative balance, people will either try to make it
positive by replacing the “bad investment” with a good one, or by letting the payment
depreciate with time. Once enough time has passed since the bad purchase, the mental
account will be closed.

Finally, Thaler (2004) describes payment decoupling, which is best described by the
functioning of credit cards. Credit cards have two effects: the payment is delayed, and the
payment is separated from the purchase. The payment delay is unlikely to be the main appeal
of the credit-card purchase, because people prefer to pay before rather than later. However,
the separation of purchase and payment appears to make the payment less relevant (as
memory fades). Additionally, once the card bill arrives, the purchase is mixed in with many
others, so one singular purchase will appear less relevant in the context of a very large bill
(Thaler, 2004)

Budgeting 
According to Thaler (2004), expenditures, wealth, and income can be labeled and categorized
into certain mental accounts. One of the central aspects of budgeting is that the budgets of
mental accounts are not fungible. This means that once a budget is allocated to a specific
mental account, the amount assigned will not be altered even if this account is used up and
another account contains plenty. For instance, a study found that the willingness to buy a $50
ticket to a theater play was greatly inhibited if the subject had spent $50 earlier that week on a
basketball game. Instead, if the subject had spent $50 on a parking ticket earlier that week, he
was more inclined to buying the $50 ticket for attending a basketball game. Hence, this
exemplifies the non-fungibility of budgets. It shows that the subject exhibits two different
budgets: one for going out and one for miscellaneous items such as a parking ticket.
 
Moreover, it is also worth mentioning that people gravitate to setting budgets too low for
certain categories in order to mitigate self-control problems. Consequently, this is related to
the choices that people make as the example of purchasing a more expensive bottle of wine
illustrates. Expensive bottles of wine are more tempting as they have better quality and taste.
However, purchasing these is above the budget constraint. Therefore, in order to control
spending these bottles of wine are off limits. Accordingly, this person would highly
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appreciate an expensive bottle of wine as a gift. In other words, the best gift would be
something that a person would usually never purchase himself.
 
In addition, saving today for future consumption is a self-control problem also worth
mentioning. According to Thaler (2004), mental accounts for spending money can be ranked
from most tempting to least tempting. For instance, current assets are more accessible to
spend than home equity or future income accounts. Thus, the so-called “behavioral life-cycle
model” (Shefrin and Thaler, 1988) predicts that funds which can be transferred to less
tempting mental accounts are more likely to be saved.
 
Lastly, income can also induce violations of fungibility as the type of spending depends on
how and when the income was generated. This is the so-called “labeling effect” and can be
further exemplified by the question of why firms pay dividends. The attractiveness of
dividends to investors lies in the simple and natural way of self-control. Since dividends are
the only source of money that can be spent, the principal is somewhat “secure” unless the
investor sells the stock. Consequently, “the dividend acts as an allowance” (Thaler, 2004,
p.93).

Choice Bracketing and Dynamic Mental Accounting

Choice bracketing and dynamic mental accounting deals with whether several decisions
should be made individually or grouped together. Hence, it is important to take into account
prior outcomes and how that affects the risk attitude of a person. The results of the
experiment in part four indicate that a prior gain induces people to be more risk-seeking. On
the other hand, a prior loss does not necessarily prompt risk-seeking behavior unless there is a
possibility to regain the prior loss.
 
The equity premium puzzle illustrates myopic loss aversion/ narrow framing, which is the
unwillingness to take risks when choices are evaluated individually. The equity premium
puzzle is as follows: “the risk attitude of investors depends on the frequency with which they
reset their reference point, i.e., how often they ´count their money`” (Thaler, 2004). If the
frequency with which they count their money is high, this prevents investors from adopting
an investment strategy over the long-term horizon and hence, the term myopic loss aversion.
 

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The bracketing of choices can be further illustrated by the experiment where students had to
choose among six different snacks “in one of the two conditions: a) sequential choice: they
picked one of the six snacks at each of three class meetings held a week apart; (b)
simultaneous choice: on the first class meeting they selected three snacks to be consumed one
snack per week over the three class meetings” (Thaler, 2004). The results confirmed the
existence of the so-called diversification bias. When students had to undertake the
simultaneous choice, they tended to diversify their choice of snacks.
Is mental accounting good for people? What are the advantages and disadvantages?
Mental accounting possibly helps people justify bad investments, as shown by payment
decoupling and the opening and closing of mental accounts. This is not necessarily bad in
itself: it is not ideal for people’s finances, but it helps with coexisting with our irrational
nature. People will not always act like a perfectly rational homo eoconomicus, so finding
mental accounting “shortcuts” to cope with the “guilt” of bad investments and bad purchases
is, arguably, still a good thing.

On the other hand, the equity premium puzzle exemplifies a downside of mental accounting.
Depending on how choices are bracketed, that is, observed jointly or separately, this can
induce myopic loss aversion. In the case of the equity premium puzzle, investors with myopic
loss aversion fail to see the long-term horizon of their investment and are thus deprived of the
opportunity to make satisfying long-term gains. 

Henceforward, the question whether mental accounting is good for people is debatable. As
also Thaler (2004) states: “I see no useful purpose in worrying about whether or not mental
accounting is ‘rational” (p. 100). In other words, the normative status of mental accounting
should not be the focus of the debate. Rather, mental accounting can and should be regarded
as a “prescriptive device”. 

6. Which puzzles from Starmer (2000) do you think could be resolved by

mental accounting?
Starmer (2000) also illustrates the “Asian disease” problem, in which people are asked to
"imagine that the U.S. is preparing for the outbreak of an unusual Asian disease, which is
expected to kill 600 people. Two alternative programs to combat the disease have been

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proposed. Assume the exact scientific estimate of the consequences of the programs are as
follows:"

 Program A: "200 people will be saved"

 Program B: "there is a 1/3 probability that 600 people will be saved, and a 2/3
probability that no people will be saved"
 Program C: "400 people will die"
 Program D: "there is a 1/3 probability that nobody will die, and a 2/3 probability that
600 people will die"

A group of participants would receive options A and B, while another group would receive
options C and D. A and C, as well as B and D, are equivalent prospects, but they are worded
differently. The first group overwhelmingly chooses option A, while the second group
chooses option D. This is a case where ‘framing effects’ come into play, i.e. the context or
wording of the options have an effect on people’s choices: when the programs were presented
in terms of lives saved, the participants preferred the secure program, A (which equates to C),
while when the programs were presented in terms of expected deaths, participants chose the
gamble D (B). 

Framing effects are also one of the foundations of mental accounting theory. For example, we
find this in decision framing (“Framing does alter choices in the real world because people
make decisions piecemeal, influenced by the context of the choice” (Thaler, 2004)). This can
also be found in transaction utility, which is defined as the difference between the amount
paid and the ‘reference price’ for the good (the regular price that the consumer expects to pay
for this product) (Thaler, 2004). Of course, the reference price changes with the context; in
this example, we have a ‘positive’ number of saved lives in Programs A and B, and a
‘negative’ number of saved lives (a number of deaths) in Programs C and D. Because of loss
aversion (v(x)<-v(-x)), people are more inclined to choose a secure program (A) and exhibit
risk-averse behavior, but also choose the gamble (D) with risk-seeking behavior because
there is a possibility to regain a prior loss (the deaths of 400 people is understood as a prior
loss).

7. Comparison of Thaler´s and Starmer´s Approaches

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We still need to add answer to question 7

Experimental Data

a. Summary
1.1 Experiment: Going to another shop

16%
26%

16%

42%

Figure 1.1. Going to the other shop.

This first graph (figure 1.1) represents the data collected in group A. In this case, the first
question was about whether or not you would be willing to go to a shop that is 20 minutes
away in order to get a discount of 10 euros. Figure 1.1 shows that most of the answers
collected in group 2 that 42% of people would go to the other shop. In group 3, 16 percent
would go to the other shop. Now that we know that 42% of people in group 2 would be
willing to go to the other shop, we will analyze how many people would actually go. In this
case, 26 percent would not go to the shop. Whereas, in group 3 16 percent would not go. So,
if we do not make a difference in between groups we will find that 58% of students would go
to the other shop.
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1.2 Experiment: Bottle of Beer on a Hot Day

The second question asked how much we would pay for a beer on a hot day at the beach. In
this case, what we did was to find the average price that people would pay in both groups. In
the first place, we will analyze the group 2; in this case the average that people would pay is
5,58€; for group to the average is a little bit higher 5,92€.

1.3 Experiment: Bottles of Wine

The third question asked us how we would feel if we buy a bottle for 20€ in offer, the price
increases to 75€. The next graph represents how people felt in the group 2.

33%
42%

8%
17%

Figure 1.2. Feeling of the wine.

We are going to analyze figure 1.2. In this case 42 percent of the people felt like they were
drinking a 75€ wine. The next highest percentage is 33% which corresponds to the value -55,
so a 33 percent of the people felt like that, it means that they feel they saved 55 euros. A 17
percent felt like the wine was worth 20 euros. Lastly, 8 percent of the people felt like
drinking a wine of 0 euros.

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17%

50%

33%

Figure 1.3. Feeling of the wine for group 3.

For the group 3 (figure 1.3), we can see that a 50 percent of the people said that they felt like
drinking a 20€ wine. A 33 percent felt like drinking a -55€ wine. Lastly a 17 percent felt like
drinking a 75€ wine.
1.4 Experiment: Winning €30 and/or Losing €9
1.4.1 Experiment 1

In this case we have just won €30. Now we have to choose between option B where there is
no further gain or loss; or option A where we have a 50 percent chance to gain €9 and 50
percent chance of losing €9. In this case for the group 2, 69 percent of the people chose
option A. So, 31 percent chose option B. We can see these results in figure 1.4

31%

69%

Figure 1.4. Choices of group 2.

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option A
17%

Option B
83%

Figure 1.5. Choices of group 3.

For group 3 83 percent chose option B and a 17 percent chose option A. We can see in figure
1.5 more people chose option B compared to group 2 (figure 1.4).

1.4.2 Experiment 2

The next question we have to choose, once we lost 30€, between option A that means a 50
percent of gaining 9 and 50 percent of losing 9; or option B no further loss. In this case a 46
percent of the people chose option B and the 54 percent option A in the group 2. We can see
these results in the figure 1.6.

46%
54%

Figure 1.6. Choices of the group 2 once they lost €30.

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B
33%

A
67%

Figure 1.7. choices of group 3 once they lost €30.

In the group 3 67 percent of the people chose option A and 33 percent option B. We can see
that more people (an increase of 21 percent) chose option A. And also, less people chose
Option A.

1.4.3 Experiment 3
The last question asked, made the people, once they have lost €30, to choose between option
A that has a probability of 33 percent to gain €30 and 67 percent of not winning anything.
The option B will provide a gain of €10. In the group 2 we can see that 54 percent chose
option B. then, 46 percent chose option A.

Option A
46% Option B
54%

Figure 1.8. Choices of the group 2.

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1.5 Summary of the data for the groups 1 and 3

1.5.1 Experiment 1

No
33%

Yes
67%

Figure 1.9. Going to the shop in the group 1.

Yes
29%

No
71%

Figure 2.0. Going to the shop in the group 2.

In the group 1 we can see that the 67% of the people would make the trip to shop in order to
get a discount. Meanwhile the 33% left wouldn’t go.
For the group three a 71% wouldn’t go to the shop, and the 29% would.
1.5.2 Experiment 2

The averages that we found in the group 1 was 4,875€, and for the group 3 4,64€. We can see
that for the group 1 is higher because everybody is willing to pay for the beer. Meanwhile in
the group 3 one person is not willing to pay anything for the beer because he/she doesn’t
drink alcohol.
1.5.3 Experiment 3

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75 -55
22% 22%

0
22% 20
34%

Figure 2.1. Feeling of drinking the wine for group 1.

This graph represents the answers of the group 1 for the third question. In this case we can
see that the main answer is 20, with a 34% of the people. Meanwhile 0, 75 and -55 have a
22% each.

For the group 3. We can see that most of the people, a 57% said that they felt like drinking a
20€ wine. He 29% of the people said that they felt like drinking a -55€ wine. And lastly a
14% said that they felt like drinking a 75€ wine. The next graph (figure 2.2) represents the
answers of the people.

75
' 55 14%
29%

20
57%

Figure 2.2. feeling of drinking the wine for group 3

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1.5.4 Experiment 4

In the group 1, 56% of the people chose option B; the 44% chose option A. We can observe
this results in the figure 2.3

op tion A
44% op tion B
56%

op tio n B op tio n A

Figure 2.3 Choices when you won 30€ for group 1

Op tion A
43% Op tion B
57%

Oprion B Option A

Figure 2.4. choices when you won 30€ for group 3

In the group 3 the 57% of the people would choose option B, and the 43% option A. We can
see that the answer in both groups are quite similar and that means that the people preferred
to have the chance of wining 9€ with a 50% of probability.

1.5.5 Experiment 5

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Option B
29%

Option A
71%

Figure 2.5. Choices when you lost 30€ for group 1

In the group 1 we can see that 71% of the people chose option A in the fifth question; and a
29% chose option B.

Option A
Op tion B 44%
56%

Figure 2.6. Choices when you lost 30€ for group 3

In the group 3 we can see that less people chose the option A, a 44%; meanwhile more people
chose the option B with a 56%. In this case we can see that the answers are very different
between them. In the figure 2.5, so group 1, people preferred to have a chance of wining 30€
with a probability of 33%; and in the figure 2.6, that belong to the group3, people preferred to
win 10€ with a 100% of probabilities.
1.5.6 Experiment 6

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Option B
33%

Option A
67%

Figure 2.7. choices when you lost 30€ for group 1.

In the group 1 a 67% of the people chose the option A and a 33% chose option B. We can
observe these results in the figure 2.7.

Option A
29%

Option B
71%

Figure 2.8. choices when you lost 30€ for group 3

In the group 3 a 71% of the people chose option B and a 29% chose option A. Comparing
figure 2.7 and 2.8 we can see that the results are similar. In both cases most of the people
chose option B that means that they will win 10€ for sure.

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b. Compare the number of people who are going to take the 20-minute
ride for the sale across the two different versions of the question

16%
26%
16%

42%

Figure 1.1 going to the other shop.

This first graph represents the data collected in the group A. In this case the first question
made was about whether or not you would go to a shop that is 20 minutes away in order to
get a discount of 10 euros. With this graph we can see that most of the answers collected
show that in the group 2 a 42% of people would go to the other shop. In the group 3, formed
by 6 people, a 16% would go to the shop. Now that we know a 42% of people in the group 2
would go, we will analyze how many people would actually go. In this case, a 26% wouldn’t
go to the shop, for the group 3 a 16% wouldn’t. So, If we don’t make a difference In between
groups we will find out that a 58% of the people would go to the other shop. So, only a 42%
wouldn’t go.

For the group B we can see that in the group 2 a 67% of the people said that he wouldn’t go,
meanwhile the 33% left would go. If we analyze what happens with people in group 3 we can
see that a bigger percentage of people, 71%, wouldn’t go.

So, in order to analyze this data, instead of working with percentages we will transform those
into numbers to have a better idea of how people may really is.
We will start our analysis with the group B subgroup 2. In this case, as we already said a 42%
of the people would go. This means that a total of 8 people chose to go to the shop in order to
get a better price of the cell phone. In the other way around, 5 people chose not to go. It´s
important to clarify that these two numbers have been rounded out.

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Now that we already have analyzed the first subgroup (A), we will continue with subgroup B.
In this case we can see that the choices between these people are equal. This means that a
16% of the people said yes and the 16% said no. It´s important to clarify that these
percentages might seem strange but the reason to explain that is because in the tutorial group
A there are only a total of 6 people that belong to the subgroup 3. So, once we know the total
amount of people, we can see that 3 people chose to go and 3 people didn’t.

Now, that we already analyzed the tutorial group A, we will continue with tutorial group B.

No
33%

Yes
67%

Figure 1.9. Going to the shop in group 1.

Figure 1.9. going to the shop in the group 1

Yes
29%

No
71%

Figure 2.0. Going to the shop in the group 2

We are going to start explaining the first graph that corresponds to the group 3 (figure 1.9) .
In this case we can see that a 33% of the people wouldn’t go. In the other part, a 67% of the
people said that they would go. In the group 3B (figure 2.0) we can see that a 71% of the

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people wouldn’t go, this means that 5 people wouldn’t go. Then, a 29% would go, so that
means that only 2 people would go.

Now that we have a done an analysis of the graphs presented before, we are going to proceed
to compare the results that we obtained. We can see that most of the people asked would
actually go to the shop in order to get a discount because for them is big enough to drive 20
minutes to other shop.

c. Compare the prices people are willing to pay for the beer in the two
different conditions

In order to compare the results of this part we are going to find the averages in the different
groups in order to be able to compare the different decisions. In this case we chose to do it in
this way because the answer were very different between them.

In the tutorial group A, subgroup 2, the average amount that the people is willing to pay is
5,61€. Is important to mention that the minimum that someone was willing to pay is 4€ and
the maximum is 10€. This is important to mention because knowing the maximum and
minimum provides us with an idea of the limits of the prices.

For the subgroup 3 we can see that the average that the people is willing to pay is lower, 5,5€.
But when we obtain the maximum and minimum, we can see that the differences in between
are not that big as in the previous group. In this case, the minimum is 4 and the maximum is
9. Is also important to mention that the sample size is smaller than in the subgroup before.
This means that higher valuation of the price affects much more the average than in the
subgroup 2.

Once we already analyzed the tutorial group, we will proceed to analyze the group meeting
B.

In the subgroup 1 we can see that the average is 4,875, approximately 4,88€. For the
subgroup 2 the average is a little bit lower, 4,8333€, approximately 4,84€.

Once we know all the averages, we will compare the results obtained. We can see that the
highest amount of money is obtained in the subgroup 2 of the tutorial group A (5,61€); this

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result is closely followed by the subgroup 3 where the amount of money purposed was 5,5€.
In the third place, we find the subgroup 1 in the tutorial group B, that on average is willing to
pay 4,88€. In the last place, and also the lowest offer, we can find the subgroup 2.

We can see, that the people who formed the tutorial group A is willing to pay, on average, a
higher amount of money than the people in the tutorial group B.

d. How do subjects' responses to question 3 compare to those reported in

the paper?

In the book, the price that the people is willing to pay is 2,65€ for a beer in a resort. We can
see huge differences with the results of our experiment.

In our experiment the lower average that we can find is 4,84€. This amount is almost the
double of the price that the people is willing to pay in the experiment in the book.

As we were comparing the book results with the lower one that we got, the rest of the results,
as we can see in the question before, are much higher than the ones on the book.

e. Did subjects correctly anticipate the behavior of the MBA students?

Do your answers to question 4 above and the data from the experiment
match?

In order to answer this question, we will use not only the results that we got but also the data
from the book Advances in Behavioral Economics.

The information needed to solve this question is found on the page 94. In this page we can
see the results founded, that will be presented below.

Problem 1. You have just won $30. Now choose between:

a. A 50% chance to gain $9 and a 50% chance to loose $9. [70]

b. No further gain or loss. [30]

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Problem 2. You have just lost $30. Now choose between:

a. A 50% chance to gain $9 and a 50% chance to loose $9. [40] b.

b. No further gain or loss. [60]

Problem 3. You have just lost $30. Now choose between:

a. A 33% chance to gain $30 and a 67% chance to gain nothing. [60]

b. A sure $10. [40]

In order, to make easy the comprehension of the comparation, we will be comparing one by
one the problems. In this case for the group 2(A), 69% of the people chose option A. So,
31% chose option B. In this group we can see that the results obtained are more similar to the
ones presented on the book. In our results the amount of people who chose option A is a 69%
compared to the 70% from the book. Thus, the results in the amount of people who chose
option B are also very similar; 31 compared to a 30%. So, we can determine that this group is
more similar to the results presented in the book.
What happened before is not present in group 3 (A), in this group 83% chose option B and a
17% chose option A. When we compare these results, we can see that the amount of people
who chose Option A is much lower (17%<70%) in comparison with the book results. Thus,
the percentage of people who chose Option B is much higher in comparison with the book
data (83%>30%).
Once we have compared it with the group A, we will do the same with group B.

In the first one, we can see that the amount of people who chose option A is a 70% and for B
is 30%. Now we will compare this data with the data found in the group 1 (B). In this group a
56% of the people chose option A; the 44% chose option B. We can see great differences
between our data and the one presented in the book. As we can see, in the book´s data the
percentage who chose option A is bigger (70%>56%), therefore the percentage of the option
B is bigger in our results (44%>30%). If we compare the book results with the group 3 (B)
we can see that the group 3 the 57% of the people would choose option B, and the 43%
option A. In this case, we have the same phenomenon. More people chose option B in
comparison with the book results (57%>30). Thus, less people chose option A (70%>43%).

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To start comparing the second problem, we will attach again the data to make the reading
easier. In this case a 40% opted for option A, and 60% for B. In order to keep the coherence
throughout this comparison we will start by comparing the data with the group A and then we
will continue with group B.

The data related to the group A that we obtained is the following a 46 percent of the people
chose option A and the 54 percent option B in the group 2. We can observe that a bigger
amount of people chose option A, the increase was of a 6%. Thus, the option B was less
chosen by the group 2 (60%>54%). In the group 3 ,67% of the people chose option A and
33% option B. in this case we can see even more differences, the percentage of people who
chose option A is much higher compared to the results of the book (67%>40%), therefore the
percentage of the option B is consequentially lower (60%>33%).

Now that we compared the group A, we will do the same with group B. In this group the
data that we obtained was the following: In the group 1 we can see that 71% of the people
chose option A and a 29% chose option B. In the group 3 we can see that less people chose
the option A, a 44%; meanwhile more people chose the option B with a 56%. In both groups
we can see that the amount of people who chose option A is bigger compared to the results
given by the book. Therefore, the percentages of the option B are smaller.
In order to keep our analysis method, we will provide firstly the data obtained from the book,
we will compare it with the group A and lastly with the group B. The data from the book is
the following: 60% of the people chose option A and 40% chose option B. In the group 2 we
can see that 54 percent chose option B then, 46 percent chose option A. As we can see our
results differ from the ones in the book. In our case, only a 46% of the people chose the
option A, that means that a 14% less of the people chose this option. When we compare the
percentages related to the option B, we can see that 54% of the people in or study chose
option B, compared to a 40% of people that chose option B in the study presented in the
book.

Now we will compare it to the group B. The data that we obtained is the following. In the
group 1 a 67% of the people chose the option A and a 33% chose option B. In the group 3 a
71% of the people chose option B and a 29% chose option A. Comparing these percentages
with the ones given in the book we can see that in both groups more people chose the option
A, and less people chose option B.

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Reference List

Shefrin, Hersh M., and Richard H. Thaler. 1988. “The Behavioral Life-Cycle Hypothesis.”
Economic Inquiry, 26(October): 609–43.

Starmer, C., 2000. Developments in non-expected utility theory: The hunt for a descriptive
theory of choice under risk. Journal of Economic Literature 38, 332_382.

Thaler, R., 2004. Camerer, colin f. and loewenstein, george and rabin, matthew, in: Guilbaud,
G. (Ed.), Advances in Behavioral Economics. Princeton University Press, pp. 75_103.

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