Behavioural Economics Assignment Example | Topics and Well Written Essays - 1750 words

Behavioural Economics - Assignment Example Thus, this discussion seeks to analyze the cognitive process of organizing, using and keeping track of financial usage for individuals and households, as related to the forecasting for possible attainment of gains or losses. In realizing this evaluation, the discussion will first assess the process of assigning and grouping different financial expenditures into different categories referred to as mental accounts, followed by the evaluation of the factors informing the choice financial spending or investment functions to align with the predicted chances of gains or losses. The Mental Accounting Theory provides an explanation related to how households and individuals keep track of where their incomes are going and how such entities apply active cognitive processes to control their financial spending (Dawes, 2001:47). The difference between conventional financial accounting undertaken by business entities and the mental accounting applied by individuals and households is that; there lacks specific and elaborate rules on how mental accounting procedures should be undertaken. Thus, the process of mental accounting can only be achieved through observing financial behaviors, and then inferring rules to the behaviors, so as to control future spending. Thus, due to the lack of elaborate rules to guide financial allocations to various individual or household spending activities, these entities apply a variety of subjective criteria that sees finances prioritized and allocated to different spending functions, for example based on the sources of the incomes or t he intent for the specific functions (Baddeley, 2013:147). Thus, the Mental Accounting Theory provides that individuals and households irrationally assign different spending functions to a certain asset group, which in turn results in detrimental effects on the spending behavior and consumption decisions subsequently mad by the entities (Tversky & Kahneman, 1981:455). In this respect,