Richard Thaler's "Misbehaving" Volume 1 // Part 2

Unlike Part 1 of this Blog, part 2's Mental Accoutning is made up of a measly 4 sections; Bargains and Rip-Offs, Sunk Costs, Buckets and Budgets, and At the Poker Table. Chapter 1, however, is tied for the largest chapter in the entire book, so I'll let it off the hook. Chapter 2 takes many of the basic principles described in Chapter 1 and pushes them further, allowing for even greater economic understanding. 

The Majority of this chapter details and explains the difference between acquisition utility and transaction utility. These two ideas, which I will further explain in a moment, make up the basis for many economic phenomena that would otherwise stump an Econ. Remember from my last post what an Econ is; a fictional person that makes perfectly optimized economic decisions 24/7/365. The first chapter, Bargains and Rip-Offs sees Thaler (he's the author of the book) using an example in order to allow the reader to walk through the basis for the utilities mentioned above before he explains it himself. I will paraphrase the example here. 

Maya, a completely normal middle-class lady, is shopping for a new comforter to go on her double-sized bed. Now it is assumed that this is the only store in the world that sells comforters and they only have one style available in 5 sizes; single, double, full, queen, and king. This is important because it eliminates the need to incorporate economic analysis between multiple stores/styles (aka we don't have to say store A has a sale vs. store B and so on). To Maya's surprise, the store is having a special where every size is the price of a single, $150.Feeling as though she has really got a good deal, Maya can't help but purchase the massive king-sized comforter. 

Now, Maya's decision makes sense to almost every rational person. Why would you not buy the most for the least given the option? However, this breaks almost every rule for an optimizing Econ. To an Econ, the ONLY option would be to choose the correct size regardless of price because that's what was desired. So why then does it make perfect sense to us but would stump an Econ? This is the basis for the utilities mentioned a while ago. 

Acquisition utility(AU) is the basis for the proper economic theory that Econs adhere to. Thaler goes on a multi-page tangent describing this idea so I will try and pare my explanation down. Essentially, AU is what is left when you subtract the opportunity cost of something from the value you'd gain from it. In other words, it is the actualized and optimized value of a chosen option when all other options have been weighed and compared. In a perfectly optimized Econ world, AU is always 0 because everything equals out. The only time it is not 0 is in the real world whenever someone values something more than the market value. In a sense, auctions are just really professional versions of AU competitions. 

Contrasting to this, transaction utility(TU), is captured as a whole by Thaler himself as the perceived quality of a deal. TU is the little space in between what we think something ought to cost, known as the reference price, and its actual stated price. Both these prices can fluctuate and even be harnessed in certain ways. For example; you are at a sports game and a hamburger costs 3x as much as it would normally. The deal stinks from your point of view and negative TU is perceived, as a "ripoff." Let's say then you are getting a king-size comforter-priced item for the perceived price of a twin-sized payment. The deal is great from your point of view and you experience positive TU, a "bargain." This is exactly what TU seeks to explain, how certain price adjustments can positively or negatively impact one's economic decision-making despite no actual impact on the item in question. Econs see the game and the sale as simply economic adjustments to be compared against their economic value. Humans see a hamburger that has no right costing so much.