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Sure, I can afford it: The cognitive principles behind mental accounting

April 17th, 2017 3 comments

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I could really go for a burger and milkshake right now.  It’s the end of the month; rent has been paid, my student loan contribution is accounted for, and I’ve maxed out my self-imposed monthly restaurant allowance. It looks like I’m out of luck.  But, after some quick mental math, I realize that I spent $10 less than expected on groceries this month.  Score!  It’s burger time. We’ve all done this: designating money for specific purposes, guesstimating how much we’ve spent, and mentally moving money around when convenient.  These behaviors, among others, are what psychologist Richard Thaler (1985) calls “mental accounting.”  Mental accounting is the process of creating mental representations (meaningful mental images) of money based on its form, how it was acquired, and how you intend to use it.  Indeed, there was nothing concrete about my monthly restaurant allowance or grocery budget.  They were simply my personal mental accounts.  In other words, mental accounting helps us organize our spending behaviors.  It’s not just about budgeting, though.  Categorizing money for one purpose or another can help us restrict our purchases, or, like my decision to buy the burger and milkshake demonstrated, justify moving money around our mental accounts.

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