Thinking and Deciding

MENTAL ACCOUNTING 303
a promotion focus think in terms of duties and obligations and do better when the
task is presented as avoiding losses. Despite these individual differences, Higgins
has also found that this “regulatory focus” can be manipulated by the way the task is
presented (e.g., giving correct answers versus avoiding errors).
Integration and segregation
In the early 1980s, many automobile manufacturers in the United States started to
offer rebates to customers who purchased their cars. Why rebates? Why not just
reduce the price of the car by the “rebate” amount? It seems like a dubious sales
technique, since it can be disadvantageous for purchasers: they have to pay sales tax
on the full price of the car.
Thaler (1980) argues that the rebate program seemed more attractive to consumers
than a simple price reduction because consumers keep separate mental accounts
for the price of the car and the rebate. If the price of the car was simply
reduced from $8,000 to $7,500, the buyer would, according to the value function of
prospect theory, gain a subjective value of v(−$7, 500) − v(−$8, 000). This is a
small gain, because the curve of the function for losses is convex and has a low slope
in this range. If, on the other hand, the buyer codes the $500 separately, the gain
would be v($500), a large gain, because the Value function is steeper near zero.
Thaler suggests that we either integrate or segregate multiple outcomes (gains or
losses) of a single option. If we integrate outcomes, we add them together before we
apply the Value function. They are considered as part of the same mental account.
If we segregate different outcomes from each other, we apply the Value function to
each gain or loss and then mentally add or subtract the derived values to find the total
gain or loss. In general, segregation appears to be irrational, but integration can be
difficult when the goods in question are not monetary. Indeed, multiattribute utility
theory (MAUT) assumes that we do not integrate dimensions that are expressed in
different units (for example, the salary of a job and its consistency with our personal
goals).
Despite the rationality of integration in most circumstances, by segregating outcomes
at appropriate times we can deceive each other — and even deceive ourselves
— into thinking that we are getting more for our money. One simple principle here
for a seller (including the person who wants to sell something to himself) is the motto
“Segregate the gains, integrate the losses.” The late-night television advertisements
for kitchen utensils offer a long list of (segregated) gains from buying the product,
as does the car dealer who wants to add many options (for only a “small” additional
cost). In the latter case, each option alone may not be worth it if considered separately,
but if its price is integrated with the loss already taken in purchasing the car,
the additional decrease in value is slight (because the value curve is not steep at this
point). The options themselves are mentally segregated, because they are different
sorts of things: They cannot simply be added. The subjective value of each option
does not change as new options are added, but the subjective value of the price of
each option does decrease, because it is integrated with the price of everything else.