Prospect Theory, Mental Accounting, Nudges: Applications to Economics, Finance, Marketing, Public Policy, and to COVID-19 Pandemic Management
1 City University of New York, New York, NY, USA
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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.
COVID-19, prospect theory, mental accounting, nudge, loss aversion, reference point, social intervention
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