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Goals and bracketing under mental accounting

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  • Koch, Alexander K.
  • Nafziger, Julia

Abstract

Behavioral economics struggles to explain why people sometimes evaluate outcomes separately (narrow bracketing of mental accounts) and sometimes jointly (broad bracketing). We develop a theory of endogenous bracketing, where people set goals to tackle self-control problems. Goals induce reference points that make substandard performance painful. Evaluating goals in a broadly bracketed mental account insulates an individual from exogenous risk of failure; but because decisions or risks in different tasks become substitutes there are incentives to deviate from goals that are absent under narrow bracketing. Extensions include goal revision, naïveté about self-control, income targeting, and firms' bundling strategies.

Suggested Citation

  • Koch, Alexander K. & Nafziger, Julia, 2016. "Goals and bracketing under mental accounting," Journal of Economic Theory, Elsevier, vol. 162(C), pages 305-351.
    • Handle: RePEc:eee:jetheo:v:162:y:2016:i:c:p:305-351
    DOI: 10.1016/j.jet.2016.01.001
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    4. Daniel Reck & Arthur Seibold, 2022. "The Welfare Economics of Reference Dependence," CESifo Working Paper Series 9999, CESifo.
    5. Botond Kőszegi & Filip Matějka, 2020. "Choice Simplification: A Theory of Mental Budgeting and Naive Diversification [“Fungibility, Labels, and Consumption,”]," The Quarterly Journal of Economics, Oxford University Press, vol. 135(2), pages 1153-1207.
    6. Victor Gonzalez-Jimenez & Patricio S. Dalton & Charles N. Noussair, 2019. "The Dark Side of Monetary Bonuses: Theory and Experimental Evidence," Vienna Economics Papers vie1909, University of Vienna, Department of Economics.
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    8. Koch, Alexander K. & Nafziger, Julia, 2021. "Motivational goal bracketing with non-rational goals," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 94(C).
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    15. Francesco Fallucchi & Marc Kaufmann, 2021. "Narrow Bracketing in Work Choices," Papers 2101.04529, arXiv.org, revised Feb 2021.
    16. Victor Gonzalez-Jimenez & Patricio S. Dalton & Charles N. Noussair, 2019. "The Dark Side of Monetary Bonuses: Theory and Experimental Evidence," Vienna Economics Papers 1909, University of Vienna, Department of Economics.
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    More about this item

    Keywords

    Quasi-hyperbolic discounting; Reference-dependent preferences; Self-control; Mental accounting; Choice bracketing; Goals;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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