Why do we think less about some purchases than others?

The

Mental Accounting

, explained.

Bias

What is Mental Accounting?

Mental accounting, also known as mental accounting theory, 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.

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Sources

Thaler, R. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199-214. https://doi.org/10.1287/mksc.4.3.199
Mental accounting. (2019, March 28). The BE Hub. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/mental-accounting/
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
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
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
Vedantam, S. (2007, May 19). Mental Accounting. The Washington Post. https://www.washingtonpost.com/wp-dyn/content/article/2007/05/19/AR2007051900316.html
Sunk cost fallacy. (2020, April 22). The BE Hub. https://www.behavioraleconomics.com/resources/mini-encyclopedia-of-be/sunk-cost-fallacy/
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
Thaler, R. H. (2000). Toward a positive theory of consumer choice. Choices, Values, and Frames, 269-287. https://doi.org/10.1017/cbo9780511803475.016
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
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
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.
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
Leng, Y. (2024). Can LLMs Mimic Human-Like Mental Accounting and Behavioral Biases? Available at SSRN: https://ssrn.com/abstract=4705130 or http://dx.doi.org/10.2139/ssrn.4705130
Borah, A. J. (2023). The role of artificial intelligence in enhancing mental accounting and improving working capital management for entrepreneurs. International Research Journal of Humanities and Interdisciplinary Studies, 4(7).
Prelec, D., & Loewenstein, G. (1998). The Red and the Black: Mental Accounting of Savings and Debt. Marketing Science, 17(1), 4-28.
Lee, C-Y., & Morewedge, C. K. (2023). Mental accounting of product returns. Journal of Consumer Psychology, 33(3), 583-590.
Thaler, R. H., & Johnson, E. J. (1990). Gambling with the house money and trying to break even: The effects of prior outcomes on risky choice. Management Science, 36(6), 643-660.
Mandell, E. (2017). Behavioral Economics and Problem Gambling. Thesis, College of Charleston. https://api-d.library.cofc.edu/server/api/core/bitstreams/664d2105-3739-46c1-aad1-75aff3f473d7/content
Gross, D. B., & Souleles, N. S. (2002). Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data. The Quarterly Journal of Economics, 117(1), 149–185, https://doi.org/10.1162/003355302753399472
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CFI Team. (n.d.). Mental Accounting. Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/management/mental-accounting/
Cheng, L., Yu, Y., Wang, Y., & Zheng, L. (2023). Influences of mental accounting on consumption decisions: asymmetric effect of a scarcity mindset. Frontiers in psychology, 14, 1162916. https://doi.org/10.3389/fpsyg.2023.1162916

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

Dr. Sekoul Krastev is a decision scientist and Co-Founder of The Decision Lab, one of the world's leading behavioral science consultancies. His team works with large organizations—Fortune 500 companies, governments, foundations and supernationals—to apply behavioral science and decision theory for social good. He holds a PhD in neuroscience from McGill University and is currently a visiting scholar at NYU. His work has been featured in academic journals as well as in The New York Times, Forbes, and Bloomberg. He is also the author of Intention (Wiley, 2024), a bestselling book on the science of human agency. Before founding The Decision Lab, he worked at the Boston Consulting Group and Google.

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