Fungibility, Labels, and Consumption

Abstract

The fungibility of money is a central principle in economics. It means that any unit of money is substitutable for another. For consumption decisions, fungibility implies the specific composition of income to be irrelevant. In this paper, we show experimentally that even in a simple, incentivized setup many subjects do not treat money as fungible. Subjects are influenced by a label attached to a part of their budget and they change consumption in line with the suggestion of the label. Subjects with lower mathematical ability are more likely to exhibit this effect. An additional vignette survey confirms the experimental findings. Our results lend support to behavioral models like narrow bracketing or mental accounting and suggest, amongst others, that in-kind benefits distort consumption more than usually assumed.

Revealing Choice Bracketing

“…The mental budgeting approach has been useful in applications to finance (e.g. as in the disposition effect of Shefrin and Statman 1985 and Odean 1998; see also Imas, 2016), the study of flypaper effects [Hines andThaler, 1995, Abeler andMarklein, 2017], and some consumption choices Shapiro 2013, 2018). Recent work derives mental accounts endogenously: Kőszegi and Matějka [2020] derive mental accounts as a response to attention costs in a rational inattention framework,…”

The Leverage Self-Delusion: Perceived Wealth and Cognitive Sophistication

“…All in all, the level of consolidated assets and debt is the only element of variation between the two profiles in each pair. However, as it has been extensively shown (Abeler and Marklein, 2017;Modigliani and Miller, 1958;Thaler, 1990), in the absence of frictions, the composition of the net worth should not affect perceptions, preferences and choices. In fact, according to the predictions of consumer theory, a rational individual should perceive the two profiles in each pair as fungible and state that they are equivalent.…”

“…All in all, absent any frictions, the composition of a given net wealth should not affect perceptions, preferences and choices (Abeler and Marklein, 2017;Modigliani and Miller, 1958;Thaler, 1990). Therefore, a rational subject should perceive the two profiles in each pair of the first task as financially equivalent and assign the same grade to all profiles in the second task.…”

Fully Closed: Individual Responses to Realized Gains and Losses

“…Thus, the transfer between accounts matters, even though the money is theoretically fungible (abstracting from transaction costs). Thaler (1985) and Shefrin and Thaler (1988) pioneered the mental accounting literature, and several studies provide additional empirical evidence (Huffman and Barenstein, 2005; Abeler and Marklein, 2008; Choi, Laibson, and Madrian, 2009; Milkman and Beshears, 2009; Feldman, 2010; Karle, Kirchsteiger, and Peitz, 2015). In the domain of stock market investments, mental accounts are a necessary ingredient to explain the disposition effect (Odean, 1998), that is, the empirical phenomenon whereby investors hold on to unrealized capital losses.…”