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