Template-Type: ReDIF-Paper 1.0 
Title: Consumption modelling using categorisation-enhanced mental accounting
Author-Name: Szymon Chudziak 
Abstract: Credibly representing category-of-goods mental accounting in an intertemporal optimisation framework is notoriously difficult, as this modelling approach imposes interrelations between the demand for different categories through first-order conditions. This breaks the principle of nonfungibility, contrary to the rationale of mental-accounting theory. Proofs that using intertemporal optimisation is futile in modelling this kind of behaviour are provided, and an alternative is developed: a procedural-behavioural merger of mental accounting and categorisation theories. The merger is necessary to enhance mental-accounting theory, which by itself does not inform about how mental budgets are formed, what they include and how money is spent from various accounts. A classification of six basic consumer types was devised, basing on the differences between their mental-accounting systems and variations of changes of expenditure in response to variations of net disposable income and other possible stimuli. Representing the consumer problem as a behavioural procedure including spending on nondurable and frequently-bought durable goods and decisions whether or not to purchase very expensive durable goods, such as houses and flats, allows to model real-world features such as infrequent purchases and rare debt-taking. The devised working-life cycle models of consumer behaviour are consistent with microeconomic evidence on consumption, including those features that are not accounted for by various versions of the permanent income or buffer-stock models.
Number: 2023-090
Length: 61 pages 
Creation-Date: 2023-07
Keywords: mental accounting, consumption, consumer choice, behavioural economics, agent-based computational economics, simulation models
Classification-JEL: D90, D91, D11, D15, D14
File-URL: https://hdl.handle.net/20.500.12182/1093
File-Format: Application/pdf
DOI: 10.33119/kaewps2023090
Handle: RePEc:sgh:kaewps:2023090