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Mental Accounting

Mental accounting is treating money differently based on its source or intended use, violating the principle that money is fungible (interchangeable).

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Exam Tip

Mental accounting violates fungibility. Richard Thaler Nobel Prize. Example: savings at 2% while 20% credit card debt.

What is Mental Accounting?

Richard Thaler's Nobel Prize concept - we categorize money into mental "buckets."

Examples

  • Spending bonus "freely" while carrying debt
  • Keeping savings earning 2% with 20% credit card debt
  • Treating "found money" differently

Positive Uses

  • Forced savings (retirement "untouchable")
  • Budget categories
  • Goal-based investing

Study This Term In

Series 65Series 66

Related Terms

Loss Aversion

Loss aversion is a cognitive bias where the psychological pain of losing is approximately twice as powerful as the pleasure of gaining an equivalent amount.

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