Why do we think less about some purchases than others?
Mental Accounting
, explained.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.
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.
