Mental accounting and behavioural hierarchy: Understanding consumer budgeting behaviour

Jing Jian Xiao,Barbara O'Neill

doi:10.1111/ijcs.12445

Abstract

AbstractBudgeting is an important step in consumer finance. Budgeting behaviour is considered a desirable financial behaviour to indicate consumer financial capability. However, systematic research on budgeting behaviour with a large scale national sample is limited. The purpose of this study was to address this research gap and examine characteristics of budgeting behaviour from the perspective of a behavioural hierarchy, which is related to mental accounting. The assumption holds that consumer financial behaviours may be performed in a hierarchical manner along with an increase in economic resources. Using data from the 2015 National Financial Capability Study, evidence suggests that budgeting behaviour is at the lower end of the behavioural hierarchy. This finding has implications for consumer financial professionals.

Highlights

Inspired by the theory of mental accounting (Thaler, 1985), this study examined the characteristics of consumer budgeting behavior
The assumption holds that consumer financial behaviors may be performed in a hierarchical manner along with an increase in economic resources
Accounts can be balanced daily, weekly, yearly, and so on, and can be defined narrowly or broadly. We argue that this characteristic of mental accounting can be reflected in consumer financial behaviors, for example, budgeting behavior

Summary

Introduction

Inspired by the theory of mental accounting (Thaler, 1985), this study examined the characteristics of consumer budgeting behavior. Mental accounting refers to “the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities” (Thaler, 1999, p.183). According to Thaler, mental accounting includes several components. One of the components of mental accounting concerns the frequency with which accounts are evaluated. Accounts can be balanced daily, weekly, yearly, and so on, and can be defined narrowly or broadly. We argue that this characteristic of mental accounting can be reflected in consumer financial behaviors, for example, budgeting behavior. We assume that consumer budgeting behavior is located at the low end of behavioral hierarchy

Methods

Results

Conclusion