Discount Ratio Effect and Mental Accounting in Money Saving Decisions

Abstract

The discount ratio effect, a systematic devaluation of savings as the ratio of the present to discounted values decreases, was demonstrated in the classic “Jacket and Calculator” problem by Kahneman and Tversky (1984). The effect is a clear violation of economics principle of fungibility for money. A specific type of mental accounting is considered to be responsible for this effect (Kahneman & Tversky, 1984). Our recent study suggested that the discount ratio effect diminishes when savings are in the context of intertemporal choices (Wang, 2004). The present research further explored some antecedent conditions of the discount ratio effect, and examined reasons for participants' purchasing decisions. Results showed that interactions between ratio of savings and delay were not consistent but dependent on the content of the purchase (books vs. cell phones). Participants were more likely to spend effort on savings for hedonic purposes in high discount ratio conditions and for utilitarian purposes in low discount ratio conditions. Agreement ratings to mental accounting arguments revealed different patterns in delay and travel conditions.