Why do we think less about some purchases than others?

Mental Accounting

, explained.
Bias

What is Mental Accounting?

Mental accounting explains how we tend to assign subjective value to our money, usually in ways that violate basic economic principles.1 Although money has consistent, objective value, the way we go about spending it is often subject to different rules, depending on how we earned the money, how we intend to use it, and how it makes us feel.

The image illustrates "Mental Accounting" with a stick figure holding a $1,000 bill, comparing three perspectives: the literal value ("Piece of Paper"), the social value ("$1,000 of Fungible Value"), and the mental allocation of the amount into specific categories like shoes, food, and a custom portrait of a dog.

Where this bias occurs

Imagine you’re walking down the street, and you happen to find a $100 bill lying on the sidewalk. Ordinarily, you’re a pretty frugal person, and you’ve been trying to save some money to put towards buying a car in the future. Today, however, you take your newfound $100 and put it towards an expensive dinner. You tell yourself that this money isn’t “car money”—this is a one-off, special occasion, so why not treat yourself to a nice evening out? Your mental categorization of the $100 bill as different is an example of mental accounting at work.

Related Biases

Sources

  1. Thaler, R. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199-214. https://doi.org/10.1287/mksc.4.3.199
  2. Mental accounting. (2019, March 28). The BE Hub. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/mental-accounting/
  3. Zhang, C. Y., & Sussman, A. B. (2018). Perspectives on mental accounting: An exploration of budgeting and investing. Financial Planning Review, 1(1-2), e1011. https://doi.org/10.1002/cfp2.1011
  4. Reinholtz, N., Bartels, D. M., & Parker, J. R. (2015). On the mental accounting of restricted-use funds: How gift cards change what people purchase. Journal of Consumer Research, ucv045. https://doi.org/10.1093/jcr/ucv045
  5. Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American Psychologist, 39(4), 341-350. https://doi.org/10.1037/0003-066x.39.4.341
  6. Vedantam, S. (2007, May 19). Mental Accounting. The Washington Post. https://www.washingtonpost.com/wp-dyn/content/article/2007/05/19/AR2007051900316.html
  7. Sunk cost fallacy. (2020, April 22). The BE Hub. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/sunk-cost-fallacy/
  8. Thaler, R. H. (1999). Mental accounting matters. Journal of Behavioral Decision Making, 12(3), 183-206. https://doi.org/10.1002/(sici)1099-0771(199909)12:3<183::aid-bdm318>3.0.co;2-f
  9. Thaler, R. H. (2000). Toward a positive theory of consumer choice. Choices, Values, and Frames, 269-287. https://doi.org/10.1017/cbo9780511803475.016
  10. Harbour, S. (2019, November 1). Are bad mental accounting habits holding you back? Manulife Bank. https://www.manulifebank.ca/personal-banking/plan-and-learn/personal-finance/are-bad-mental-accounting-habits-holding-you-back.html
  11. Appelbaum, B. (2017, October 9). Nobel in Economics Is Awarded to Richard Thaler. The New York Times. https://www.nytimes.com/2017/10/09/business/nobel-economics-richard-thaler.html
  12. Prelec, D., & Simester, D. (2001). Always leave home without it: A further investigation of the credit-card effect on willingness to pay. Marketing letters, 12(1), 5-12.
  13. Shafir, E., & Thaler, R. H. (2006). Invest now, drink later, spend never: The mental accounting of delayed consumption. SSRN Electronic Journal, 27, 694–712. https://doi.org/10.2139/ssrn.901830

About the Authors

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Dan Pilat

Dan is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. Dan has a background in organizational decision making, with a BComm in Decision & Information Systems from McGill University. He has worked on enterprise-level behavioral architecture at TD Securities and BMO Capital Markets, where he advised management on the implementation of systems processing billions of dollars per week. Driven by an appetite for the latest in technology, Dan created a course on business intelligence and lectured at McGill University, and has applied behavioral science to topics such as augmented and virtual reality.

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Dr. Sekoul Krastev

Sekoul is a Co-Founder and Managing Director at The Decision Lab. He is a bestselling author of Intention - a book he wrote with Wiley on the mindful application of behavioral science in organizations. A decision scientist with a PhD in Decision Neuroscience from McGill University, Sekoul's work has been featured in peer-reviewed journals and has been presented at conferences around the world. Sekoul previously advised management on innovation and engagement strategy at The Boston Consulting Group as well as on online media strategy at Google. He has a deep interest in the applications of behavioral science to new technology and has published on these topics in places such as the Huffington Post and Strategy & Business.

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