Sunday, 1 January 2012

Coupon And Discount as "Mental Credits"

Consider this. You get Rs 500 discount coupon at a book store for buying products worth Rs 4,000. You decide to use the discount coupon on your next visit to the store.

How would you spend the coupon? If you are typical consumer, you will most likely use the coupon to indulge on a fancy or a costly product in the store that you would otherwise not buy! Why?

Suppose on your next visit to the store, you decide to buy 5 books to help you with your continual professional education. Assume that these books cost Rs 3,500.

You then spot a music CD that costs Rs 1,500. The CD contains good music but is expensive. You might still decide to buy the CD. Why? You rationalise that the CD is a great buy at Rs 1,000. You, hence, use the Rs 500 discount coupon to buy the CD.

Your decision will seem irrational to classical economists. After all, your total invoice amount will be Rs 5,000 less Rs 500 discount- whether you use the discount coupon on the CD or on the books! But you would be “mentally” unwilling to use the coupon on the books. Why?
Right to indulge

It is easier to justify the purchase of the books, as they are part of your continual learning.

The same cannot be said of the music CD. You, therefore, feel guilty of spending on the music CD. Using a discount coupon on the CD helps you dull the pain of paying for it! Importantly, it gives the “right” to indulge.

Behavioural economists would argue that you are suffering from a bias called mental accounting.

It refers to how we create “mental accounts” to rationalise our decisions. In this case, you “mentally” debit your education account with Rs 3,500 towards cost of five books.

You are, however, unwilling to “mentally” debit Rs 1,500 to the music account. You, hence, “credit” the discount coupon directly to the music account, lowering the cost of buying the CD!

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