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Consumption modelling using categorisation-enhanced mental accounting

Author

Listed:
  • Szymon Chudziak
Abstract
Credibly representing category-of-goods mental accounting in an intertemporal optimisation framework is notoriously difficult, as this modelling approach imposes interrelations between the demand for different categories through first-order conditions. This breaks the principle of nonfungibility, contrary to the rationale of mental-accounting theory. Proofs that using intertemporal optimisation is futile in modelling this kind of behaviour are provided, and an alternative is developed: a procedural-behavioural merger of mental accounting and categorisation theories. The merger is necessary to enhance mental-accounting theory, which by itself does not inform about how mental budgets are formed, what they include and how money is spent from various accounts. A classification of six basic consumer types was devised, basing on the differences between their mental-accounting systems and variations of changes of expenditure in response to variations of net disposable income and other possible stimuli. Representing the consumer problem as a behavioural procedure including spending on nondurable and frequently-bought durable goods and decisions whether or not to purchase very expensive durable goods, such as houses and flats, allows to model real-world features such as infrequent purchases and rare debt-taking. The devised working-life cycle models of consumer behaviour are consistent with microeconomic evidence on consumption, including those features that are not accounted for by various versions of the permanent income or buffer-stock models.

Suggested Citation

  • Szymon Chudziak, 2023. "Consumption modelling using categorisation-enhanced mental accounting," KAE Working Papers 2023-090, Warsaw School of Economics, Collegium of Economic Analysis.
    • Handle: RePEc:sgh:kaewps:2023090
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    File URL: http://hdl.handle.net/20.500.12182/1093
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    Keywords

    mental accounting; consumption; consumer choice; behavioural economics; agent-based computational economics; simulation models;
    All these keywords.

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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