What Is Mental accounting In Behavioral Economics?

Mental accounting is a psychological phenomenon in which people tend to assign different values and levels of importance to money based on how it is acquired or spent. This can lead to irrational decision-making, such as treating money from one source differently from money from another source, even if the money is identical in value. For example, a person may be more likely to splurge on a luxury item with money they received as a gift, compared to money they earned from working. Mental accounting can influence people’s behavior in various ways, including how they save, spend, and invest their money.

Related Behavioral Economics Terms