mental accounting

Syllable breakdown

Dictionary meaning

the cognitive process by which people categorise money into different mental accounts — wages, savings, bonus, windfall, gambling money — and apply different spending and risk rules to each account, violating the economic principle of fungibility that holds a dollar is a dollar regardless of its source; the concept was developed by Richard Thaler, who received the Nobel Prize in Economics in 2017 partly for this work; mental accounting explains why people simultaneously carry credit card debt at 20% interest while maintaining a savings account earning 1% — the savings account is in the safe mental account, the debt in the spending account; it also explains why people spend windfall gains such as tax refunds or bonuses more freely than equivalent earned income, treat sunk costs as relevant to future decisions, and are more willing to buy a lottery ticket with winnings than with wages; mental accounting can be harnessed by policymakers — earmarked retirement savings accounts exploit mental accounting to increase retirement savings rates

Examples

• Mental accounting led him to spend his tax refund on a vacation he wouldn't have taken if the money had arrived as a salary increase.
• The casino industry exploits mental accounting by converting cash to chips, making losses feel less real than when paying with actual money.