Mental accounting

What is mental accounting?

Mental accounting describes how people organize and evaluate financial activity. Thaler (1999) includes how outcomes are perceived, how money and spending are assigned to categories, and how broadly or frequently accounts are reviewed.

Money assigned to one category may be treated differently from an equal amount assigned to another, although the amounts have the same purchasing power. For example, a person might reserve a gift for discretionary spending while using wages for regular bills. The money buys the same things; the label changes how the person treats it.

Mental accounts can affect spending and saving. Separate budgets may help a person manage spending, but can also produce inconsistent choices when equivalent resources are treated as unavailable across categories.

Mental budgeting concerns assigning spending to separate mental categories and limits.

The house-money effect concerns treating prior gains differently from other money when taking risks.