Under prospect theory there's a concept called mental accounting.
That is, usually money is mentally coded as a gain or a loss.
So think about it.
You are again in the market for buying this suit or a jacket, however,
you might actually decide to pay with your credit card instead of cash.
Now, of course, you are paying the same price at the end of the day.
But you still think that paying the credit card gives you some time or some kind of
mental satisfaction that you are not paying for the product immediately.
Finally, there's something called disposition effect.
That is, you somehow hold on to your losses and gains.
Especially, you hold on to your losses for longer, and sale your gains faster.
What is that?
Basically say you have the jacket and you want to exchange it for a better jacket.
Now, of course, you would be not willing to immediately exchange that jacket
because you want to maintain your status quo.
It takes a lot of effort to go and choose another jacket, it takes a lot of
effort to compare the prices, compare the characteristics of the product.
And so you have in this status quo bias.
So this tendency to favor stability over chain is what the status quo is all about.
Now, let's compare this bounded rationality approach to
something which is rational.
Of course, if you are a rational consumer, you not think about all this
different elements like reference pricing, or mental accounting, what you simply do
is just look at what this jacket or suit will give you in terms of utility,
and then you maximize that utility subject to your budget constraint
that is how much you can afford in terms of the price of the product.
Once you are in this budget constraint maximization mode,
it's of course at one extreme.
On the other extreme, there's something called a motivational approach.
There a consumer is not rational at all.
So forget about maximizing your utility,
looking at your pricing, or not even looking at this reference prices, or
things like risk aversion, you just are driven by your emotions.
So think about a product, again, this jacket, and
you'll see that in a ad for a particular company which is selling this jacket,
there is a celebrity who's endorsing it.
So you really like the celebrity, and you are completely driven by your emotions,
maybe your happiness, or maybe your sadness, maybe your anger or
fear which entirely drives your decision process.
So this is how the bounded rationality approach differs from
the completely rational approach.
So in the next videos,
we'll go onto the other processes which involves the consumer decision making.
Thank you.
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