Salamon, Gábor (Morgan Stanley)
A Dollar and Another: Thoughts about Mental Accounting

A person thinking and acting rationally does not distinguish between parts of her wealth simply based on their source or intended use. No matter how we look at it, a dollar is just a dollar. Nevertheless, research shows, that in this respect, just as on many other fields, practice produces different answers than the rationality-based theory. We think differently of a given sum depending on whether we find it as a sudden gain, we earn it as a monthly salary, or we realize it as an investment profit. We also label our future spendings for vacation, wedding, pension, car purchase, living expenses, etc.
This presentation gives some insight about which considerations yield to such a mental accounting, what the costs and benefits of running mental accounts, and at last, but not least, we uncover how this is related to the way we should pack Xmas gifts.
Models we will discuss: Expected Utility Theory and von Neumann--Morgenstern axioms; Prospect Theory, Transactional Utility