Mental Accounting and Bundling Expenditures

Our willingness to spend and the way we perceive consumption choices are crucial aspects of economic behavior. But it is essential to remember the fundamental principles of prospect theory, particularly the concept of loss aversion.

For example, when we make big purchases, like a house or a car, or things like that, salespeople have noticed that we will add options that we would not normally add on our own. That fancy touch screen for the kids in the back of the car, or the third row where there are not enough kids to justify it, but it looks great, right? You are willing to pay for it because you have already spent a lot on the car.

And so car salespeople understand this.

This is a heuristic they know quite well. They are willing to take you into that room and try to get you to add tons of options that seem not to cost much, $1,000 here, $500 there, but in the end they add up. You would never make those purchases on your own. But you do them because you have already invested the money in a big car and you think, okay, this is nothing.

However, it is fascinating if you bundle these purchases, if you invite someone, for example, to go to a showroom and buy that beautiful $50,000 or $30,000 car, whatever it is. Then, about a month later, we say, "Wow, we have all these items that could make your car even more enjoyable, and they cost $10,000," you would be surprised to know how many people refuse this expense.

They have already lowered the costs.

They have already started to enjoy it. And suddenly that extra $10,000 is an increase that involves a lot of disutility. Unlike what would happen if it had been added at the time of the initial sale.

There's something 'magical' about the moment we make a major purchase. In that context, even the most superfluous expenses seem 'justified'. But if we were to consider them at a later time, they would seem absurd. It's as if our minds change the way they think depending on the moment.

You know when you buy a new computer and the salesperson "offers" you that extra warranty? 'Oh yeah, it costs little, so you're safe...'. It seems like a trifle, but in reality it's a way to make you spend more! Companies know it well and they "earn" a lot with these warranties that, most likely, we'll never use.

When we buy a new electronic device, we're often "attacked" by the fear that it might break. And so, we're willing to pay for a warranty that gives us some "peace of mind". But in reality, this is just a "trap" to make us spend more! Companies know it well and they exploit this weakness of ours.

"Because later you will buy a new one."