By Pronobesh Banerjee, Ph.D.
Let us look at two scenarios that were shown to two different sets of participants in a 1980s study.
- Imagine that you have decided to see a play where admission is $15 per ticket. As you enter the theater, you realize that you have lost the ticket. Will you still pay $15 for a ticket for the play?
- Imagine that you have decided to see a play where admission is $15 per ticket. As you enter the theater, you realize that you have lost a $15 bill. Will you still pay $15 for a ticket for the play?
Research shows that the lost cash condition had a significantly higher percentage of participants saying yes compared to the lost ticket condition. Evidently, participants viewed the two transactions differently, even though the overall outlay of going to the play remained the same—an expenditure of $30. Presumably, the transactions were viewed in terms of specific categories—play versus cash. In the lost ticket condition, an amount of $15 was already debited to the ticket account, making a second ticket purchase too expensive. On the other hand, in case of loss of a dollar bill, no amount was yet debited to the ticket account, making the purchase much easier. This process of coding transactions into specific accounts is known as mental accounting, which leads to biases like the one seen above. The question that we ask is: If money is not supposed to have any labels, a loss is a loss, so why categorize it? More specifically, is labeling of transactions into specific categories (cash versus ticket in the above example) a phenomenon typical to the Western audience?
What motivates such questioning is that the majority of studies in mental accounting, as well as behavioral economics more generally, use Western participants who are vastly different from Easterners in their thinking style. Research supports such differences between Westerners’ analytical and Easterners’ holistic style of thinking. According to Richard Nisbett and his colleagues, analytic systems of thought involve “detachment of the object from its context, a tendency to focus on attributes of the object to assign it to different categories to explain and predict the objects behavior.” Holistic thought, on the other hand, involves “an orientation to the context or field as a whole, including attention to relationships between a focal object and the field, and a preference for explaining and predicting events on the basis of such relationships.”
For example, Lian-Hwang Chiu’s research shows that when asked to categorize objects, American and Chinese children use different basis of categorization. For American children, it is primarily a focus on rule-based category formation. On the contrary, the Chinese participants were more oriented to decipher the context-dependent relationships between the given set of objects. For example, when asked to group a man, woman and child, American children are more likely to assign a man and woman in a group, evidently using a cue for a well-defined category membership—adults. Chinese children, by contrast, are more likely to group a woman and child together, emphasizing the importance of relationship that supersedes a formal logic for category formation.
This fundamental difference in the use of formal rules versus relationships is at the root of how Westerners differ from Easterners in their thinking styles. Thus, the labelling of expenses into well-defined categories—play versus cash—seem to be an outcome of how Westerners look at the world, viewing everything as a part of a well-defined category. On the other hand, Easterners look at the world in terms of relationships, where everything is connected to every other thing like the cogs in a wheel. Consequently, whether one loses cash or a ticket, both are part of going to the play, making the two scenarios financially equivalent.
Indeed, our research shows that Easterners (Indians, in this case) are more prone to coding expenses as a part of an overall expenditure. For example, results of our experiments show that Easterners code all expenses, whether one loses cash or a ticket, as a part of going to that event, rather than relegating the expenses into narrowly the defined categories of play versus cash. More importantly, and as our studies suggest, Easterners are also prone to compare the overall outlay of $30 to some other event that may turn out to be more entertaining than going to a play. For example, going to a café and spending $15 may turn out to be more entertaining than buying the ticket, which is required in both the scenarios. Consequently, the decision of going to a play is not determined by whether one has spent too much from a particular account, but on the decision of whether the overall expenditure of $30 is too expensive to merit spending. Indeed, our findings show that there was no difference in responses in the lost ticket and lost cash conditions.
This finding is in line with Easterners holistic thinking style that considers each part of a transaction into a singular whole with its associated advantages and disadvantages—should I consider going to the play or any other event that will turn out to be more entertaining. This is unlike the Westerners analytical thinking style, which considers the advantage and disadvantages separately—whether buying tickets is too expensive or not. For example, results of our study show that participants with holistic thinking style consider the overall expenditure of going to the play, while participants with analytical thinking style consider each of the expenses, loss of ticket versus cash, in a piecemeal manner that do not take into consideration the comprehensive financial outlay of the event, but each of the expenses separately.
Richard Thaler’s seminal paper on mental accounting shows that multiple gains should be segregated and multiple losses should be aggregated, because exposing consumers to multiple losses is more painful than aggregating them into a singular whole. Our research suggests that Easterners may not be swayed by such a strategy, as they look at the overall outcome of a transaction, which remains the same whether they see it separately or combined. The outcome of our study also indicates that Easterners, due to their holistic thinking styles, will be less prone to fall into mental accounting biases and associated phenomenon, such as mental budgeting and reference dependence.