Mental Accounting Influences How We Spend Our Time
We’ve all heard that time is money. Though like money, time is a scarce resource that can be consumed, saved, and invested.1 A question then arises: Are we susceptible to the same cognitive biases we encounter in the financial world when making decisions about time?
Mental accounting, a theory introduced by Richard Thaler who is a founding father of behavioral economics, is an example of a common bias in finance2 that describes the tendency for people to categorize their money into separate non-fungible accounts — or accounts that distinct from each other. Common accounts include savings accounts, chequing accounts, and retirement accounts, which have funds allocated to them based on their source or intended use and often result in irrational decision-making.
Mental accounting: how it hurts, how it helps
We have all, at least at one point in our lives, surrendered to mental accounting bias. For example, people often spend money earned unexpectedly — such as lottery winnings or gift money — faster than steadier streams of income, and on items of less importance. People also have a tendency to delay purchases for important items because their mental account for them is depleted all while they continue to spend money on less important things. Undoubtedly, these decisions violate economic rationality, which posits that money is a fungible resource whose value remains constant irrespective of its source or intended use.
Nevertheless, mental accounting bias can also be helpful in some instances; it’s often what allows people to save money in their emergency, retirement, or children’s education funds. By refusing to use money from these highly important accounts regardless of the circumstances, people are able to protect their futures at a small temporary cost.
References
1. Jacoby, J., Szybillo, G. J. & Berning, C. K. Time and Consumer Behavior: An Interdisciplinary Overview. Journal of Consumer Research vol. 2 320 (1976).
2. Thaler, R. H. Mental Accounting and Consumer Choice. Marketing Science vol. 27 15–25 (2008).
3. Becker, G. S. A Theory of the Allocation of Time. The Economic Journal vol. 75 493 (1965).
4. Rajagopal, P. & Rha, J.-Y. The mental accounting of time. Journal of Economic Psychology vol. 30 772–781 (2009).
5. Bisin, A. & Hyndman, K. Present-Bias, Procrastination and Deadlines in a Field Experiment. (2014) doi:10.3386/w19874.
6. Kahneman, D. & Tversky, A. Choices, Values, and Frames 1–16 (2000) doi:10.1017/cbo9780511803475.002.
About the Author
Sanketh Andhavarapu
Sanketh is an undergraduate student at the University of Maryland: College Park studying Health Decision Sciences (individual studies degree) and Biology. He is the co-Founder and co-CEO of Vitalize, a digital wellness platform for healthcare workers, and has published research on topics related to clinical decision-making, neurology, and emergency medicine and critical care. He is also currently leading business development for a new AI innovation at PediaMetrix, a pediatric health startup, and previously founded STEPS, an education nonprofit. Sanketh is interested in the applications of behavioral and decision sciences to improve medical decision-making, and how digital health and health policy serve as a scalable channel to do so.
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