GLIMS Journal of Management Review and Transformation

Prospect Theory, Mental Accounting, Nudges: Applications to Economics, Finance, Marketing, Public Policy, and to COVID-19 Pandemic Management

Gurumurthy Kalyanaram¹

First Published 2 Mar 2022. https://doi.org/10.1177/jmrt.22.1023226

Article Information

Volume 1, Issue 1 March 2022

Corresponding Author:

Gurumurthy Kalyanaram, City University of New York, New York, NY 10017, USA.
Email:

¹City University of New York, New York, NY, USA

Creative Commons Non Commercial CC BY-NC: This article is distributed under the terms of the Creative Commons Attribution-NonCommercial 4.0 License (http://www.creativecommons.org/licenses/by-nc/4.0/) which permits non-Commercial use, reproduction and distribution of the work without further permission provided the original work is attributed.

Abstract

In this article, we present three important behavioral/cognitive theories: Prospect theory, mental accounting, and nudge theory. We also briefly present applications of these theories to consumer, financial, and product markets, and to public policy decisions.

Finally, we discuss the application of these three theories to management of the current pandemic (COVID-19) situation, including strategizing and communicating productively. Specifically, we examine the framing of the non-pharmacological mandates, the applicable models for closing and re-opening decisions, and methods to increase the odds of diffusion of accurate information.

There are three useful insights. One, we find that framing matters in increasing the effectiveness of the mandates: exposure to gain frames yielded more support. Two, instead of closing, opening, and closing again, it is better to keep the economy (and schools/colleges) closed for a longer time period so that it does not have to be closed again. Three, an accuracy nudge increases the flow of accurate information and attenuates the false information.

Keywords

COVID-19, prospect theory, mental accounting, nudge, loss aversion, reference point, social intervention

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