Transaction Costs

Explain and give an example of a mental transaction cost.


To understand mental transaction costs, we must first define transaction costs in general. Transaction costs are what you give up when agreeing to and following through on a bargain. Mental transaction cost is the toll of thinking through a decision. In this chapter, Anderson explains that "free" works because it eliminates mental transaction costs by eliminating the felt need to decide if something is worth paying anything at all.

It may seem weird that charging an adult one extra cent would keep them from buying something. Many adults would probably pass up a penny they saw on the street deeming it not worth the effort; they have a steady or somewhat steady source of income. When going from 0 to 1 cent, a penny makes all the difference. I think looking at young teens can help clarify this concept. Many young teens don't have jobs, so even a penny seems like a lot. Let's say a young teen is at the mall with their mom. They see a gum ball machine and instantly want a piece, but it's 5 cents. Seeing this teen only has a few quarters in her pocket, is it really worth it? They then begin having to weigh what else they could buy with cents or what they could put this five cents towards if deciding against the gum ball. What if the gum ball is stale? What if it is not the desired flavor? All of these questions and the cognitive energy used in answering them are mental transaction costs. If her mom, however, pulls out a pack of gum from her purse and offers her a piece for free, all of these costs seem to disappear.

Although adults usually make money, because of the "penny gap" (described in this weeks other blog post), these transaction costs weigh heavily on all minds when deciding to purchase something for a price.