A model of mental budgeting: consumer theory and inaccurate choice

Abstract

Commonly, Economic Theory assumes that money is fungible. However, evidence from Behavioral Economics (Thaler (1999), Shapiro and Hastings (2013)) indicates this assumption may fail in many behaviors. One possible explanation for this failure is the use of Mental Budgets, which indicates that people classify their money into expenditure categories. In this work, it is developed a theoretical model that captures the idea of Mental Budgeting and discuss the consequences of such assumption for the Consumer Theory. In addition, we highlight some behavioral observations of such agent. This creates new interpretations for some anomalies such as the Preference Reversal.