Author(s)

Ciqing Mu

Corresponding Author

Ciqing Mu

ABSTRACT

The rational choice theory has led to considerable advances in economics regardless of some unrealistic assumptions. Challenging the rational choice theory and the expected utility theory, the prospect theory explains some irrational phenomena except for some limitations. Furthermore, the mental accounting bias sometimes elaborates with sunk cost effect and loss aversion, leading to extra costs and irrational decisions. This paper further explores the utilization of the mental accounting bias, the establishment of different non-transferable mental accounts with disparate utility placed into them, when encountering small and unanticipated windfalls, especially coupons. Depending on the number of bargains obtained, and the price elasticity of demand, consumers and firms/producers can benefit and lose to a different degree. Additionally, this paper evaluates possible solutions and policies to deal with or reduce the impacts of the mental accounting bias and discusses the utilization of the theory of reciprocity when encountering the small windfalls.

KEYWORDS

Rational choice theory, prospect theory, mental accounting bias, small windfalls, coupons