Mental Accounting and Sympathy Price

Abstract

“Mental accounting” begins with cognitive biases and carries on with behavioral heuristics. Loss aversion is typical behavior that the prospect theory deciphers to human behavior. Encountering a transaction, a market participant would set reference transactions and claim entitlements. Kahneman et al.’s (1986) fairness study confirms that the conflict of interests among market participants is an unavoidable course of nature. How have human beings gotten through such a dilemma of exchange in the marketplace? It is a problem of sympathy process that David Hume (1739) and Adam Smith (1759) addressed on. Business models are what human beings have devised to deal with the dilemma and strike out deals successfully. Haggling, ask-bid, auction, markup, administered pricing are the modes of transaction by which business models interact each other to make deals. Sellers and buyers quote offer prices to draw out a transaction price. It is the “sympathy price” that strikes out a contract, which is different from the equilibrium price. Hence, we reached an understanding of why a market remains unclear, and prices remain sticky.