Consumption modelling using categorisation-enhanced mental accounting

Szymon Chudziak

No 2023-090, KAE Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

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.

Keywords: mental accounting; consumption; consumer choice; behavioural economics; agent-based computational economics; simulation models (search for similar items in EconPapers)
JEL-codes: D11 D14 D15 D90 D91 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2023-07
New Economics Papers: this item is included in nep-hme
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http://hdl.handle.net/20.500.12182/1093 (application/pdf)

Related works:
Journal Article: Consumption Modelling Using Categorisation-Enhanced Mental Accounting (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2023090

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