Crux

Accounting for human psychology into economic models and theories. How pure absolute view of Econs is flawed and leads to errors.

Supposedly irrelevant factors: Human psyche, not fitting into crude mathematic models.

Endowment effect

Paying out of pocket >>>> losing on an opportunity cost. Related to ‘framing’ of extra charge on credit cards as a ‘Discount’ for cash payers, instead of a surcharge to credit card payers. Discount is losing out on an opportunity cost and surcharge is an out of pocket expense.

Something in your endowment is valued more than what’s available for endowment.

Value theory

Diminishing sensitivity to both gains and losses as the wealth increases → Losse hurt more than the contentment of gains of equivalent amount. People experience life in changes, are loss-averse(endowment effect).

Mental accounting

Psychology of spending, saving and other financial decisions.

Bargains and rip-offs

Acquisition utility: Difference between the utility gained and opportunity cost given up. In std economic models. Judging the quality of item purchased.

Transactional utility: What people also take int account. The perceived difference between the price paid and a reference price(what you’d normally pay). Not accounted for in std econ models. The lure of ‘deal of the day/week’. Exploitation by the market: mirage of winning on transactional utility. Judging the quality of deal.

Sunk costs

Continuing to do something, even if its opportunity cost is high, just because you’ve already paid for it. Also called as commitment escalation. Sunk cost fallacy is a well-known, highly prevalent cognitive bias too. Problem with mental accounting; just because we don’t want to write off a transaction as a loss, we end up doing the activity even if opportunity cost of doing it is high. Used/abused in subscription plans and all.