Thinking and Deciding

304 CHOICE UNDER CERTAINTY
We sell things to ourselves as well. Some of us would not pay $10 for a dessert
or $30 for a $10 bottle of wine, if we bought them in a bakery or wine store, but are
quite willing to pay that much if they are added on to a restaurant bill that is already
over $100. The dessert or the wine is segregated, but the loss of the $10 or the $30 is
integrated with the total price of the dinner. As an addition to the bill, the extra price
does not seem so much. In general, integration of losses reduces their effect on our
decision. Segregation of gains increases their effect. This combination, therefore,
encourages any transaction in which someone suffers a loss to obtain a gain — for
example, when someone pays money to obtain a combination of goods or services.
Mental accounts affect the effort we make to save money when we buy things.
The degree of effort seems to depend on the subjective value of the money saved, not
the amount of the money. Many of us are willing to spend as much effort to save $1
on a $10 purchase as we would to save $100 on a $1,000 purchase. Here is a good
example:
Imagine that you are about to purchase a jacket for $125, and a calculator
for $15. The calculator salesman informs you that the calculator you
wish to buy is on sale for $10 at the other branch of the store, located
20 minutes’ drive away. Would you make the trip to the other store?
(Tversky and Kahneman, 1981, p. 457)
Most subjects asked were willing to make the trip to save the $5. Very few subjects
were willing to make the trip to save $5 on the jacket, though, in an otherwise identical
problem. In both cases, the “real” question is whether you would be willing to
drive twenty minutes for $5. If the savings is part of your mental account for the
calculator, the savings is subjectively greater than it is if it is part of your account for
the jacket, because of the convexity of the curve of the Value function for losses.
More generally, whenever we spend money in order to buy something or in order
to make an investment, we are in effect “mixing” gains and losses. We lose whatever
money we pay and we gain the purchase or investment. If we mentally segregate
these gains and losses from each other, the losses will appear to be greater than if we
integrate them, because of the curves of the Value function for losses and gains.
As a result, monetary losses appear more acceptable if they are integrated with
gains. For example, most employees are not as upset by the deduction of taxes, insurance,
investments, charity contributions, and union dues from their paychecks as
they would be if they had to pay each of these things separately. Deduction practically
ensures mental integration, because many employees do not bother to think
about what their take-home pay would be without the deductions. Separate payment
would permit the employees to mentally segregate the accounts. It is not necessarily
wrong to think about a paycheck in this integrated way. In fact, one can argue that
this is the right way to think about things, if we want to approach expected-utility
theory. The deductions might be worthwhile, when seen as a reduction in our total
income. The problem arises when we do not integrate gains and losses for other
purchases, such as books or common stocks, which we are therefore less likely to
purchase than we would be if they, too, were deducted from our paychecks.