Mortgage Blog

Mental accounting

November 22nd, 2016 11:25 PM by Eric Fang

When the interest rate goes up, the business slows, so I have much time for the reading(and if possible, more running, but I just recovered by injury). So I have the chance to read lots of books. Hopefully I can finish a few for the rest of Nov and Dec.

In the book: Why smart people make big money mistakes, It talked about the mental accounting concept. If a person tried to purchase a lamp at one store for $75, and if the price is only $50 in a store 5 blocks away, the person will return and buy the cheap one. But if the price for furniture he purchase is $1775, and there is another one 5 blocks away sells for $1750, that people will not return and buy the cheap one. 

Also, if the employer gave $1000 to the employee as a refund, the employee will save most; but if the employer said that $1000 is a bonus, then the employee will spend most of it. 

If a person got $50 on the street, he will spend it for food or lottery etc right away, but this $50 is his, it is the same as any $50 he makes from the job, or investment, etc. But he treats it differently because of the mental accounting.

A lot of sales reps actually use this "mental accounting" trick. The book gives an example of GPS in the car. If it costs $1000 to install a GPS in the car, people will normally do not do that. But if the person purchases a new car to $30k or $40k, and if it costs $1000 for the built in GPS, people will have it, just because $1000 is nothing compared to $30k or $40k purchase. But this $1000 is the same as other $1000 when you purchase any other stuff. That's why most sales will ask you to "add" some small items, and normally you will do it.
Posted in:General
Posted by Eric Fang on November 22nd, 2016 11:25 PM



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