Consumption Modelling Using Categorisation-Enhanced Mental Accounting

Szymon Chudziak

Computational Economics, 2024, vol. 64, issue 3, No 3, 1442 pages

Abstract: 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 fluctuations 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 as well as 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)
Date: 2024
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Working Paper: Consumption modelling using categorisation-enhanced mental accounting (2023)
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DOI: 10.1007/s10614-023-10475-3

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