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

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


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.


So, what determines whether we’re taking that trip to Shake Shack?  It’s not quite as simple as mentally moving that grocery money to the restaurant account.  Buying the burger and milkshake likely has a lot to do with how we’re paying for it.  Now imagine a different scenario: my monthly mental accounts are all maxed out, therefore no mentally moving money around, but I just won $10 on poker night.  This $10 feels a lot different than $10 from my salary, even though both are earned, right?  How we acquire money influences how we perceive it and thus, how we use it. Money that is earned in a game-like environment – think poker or the lottery – is often spent more willingly than money earned from traditional means, like our salaries (Arkes et al., 1994). Poker money has a different mental representation than a paycheck (i.e., it’s fun spending money), and this difference has consequences for our behavior.  In other words, the likelihood that I order up a quarter-pounder burger and mint chocolate chip shake depends in part on how I acquired that $10.  



Okay, here comes another wrinkle: What if the $10 was in the form of a Shake Shack gift card instead of cash or credit?  The answer to this question has to do with how we categorize purchases.  For instance, “hedonic” items are considered fun and enjoyable; “utilitarian” items are considered functional and practical.  Clearly, a delicious burger and milkshake is much more on the hedonic side of the spectrum. Luckily, gift cards are more likely to be used for hedonic items than utilitarian items (Helion & Gilovich, 2014).  Ultimately, though the value of a gift card and a bill may be equal, the form the money takes influences how we organize it and choose to spend it.  


To be sure, it’s not just a mentally malleable budget, methods of monetary acquisition, and the form that money takes that impact consumer behavior.  There are also individual differences that influence cognition and mental accounting.  For instance, let’s go back to the first example when I chose to buy the burger and shake because I had $10 of unspent money from a different mental account.  Determining that I had that “extra” money required me to mentally sum what I had spent on groceries that month.  The accuracy of my guesstimate in part depends on the price lengths of the items I purchased (Luna & Kim, 2009).  Let’s back up for a moment here.  When price lengths are shorter (e.g., “twenty-one dollars” is shorter than “twenty-seven dollars and forty-three cents”), we can maintain more information in working memory.  Working memory is a short-term memory system that allows us to process, integrate, and use information by allocating resources to various subsystems.  The subsystem most responsible for maintaining prices of different lengths is the phonological loop.  Longer price lengths result in less accurate estimates because more digits require more time to be processed in the phonological loop (Luna & Kim, 2009).  Luckily, when we are able to group similar items together in a meaningful way, their prices are remembered as one piece of information (Luna & Kim, 2009).  Therefore, by “chunking” a grocery list into similar items, we expand the number of items accounted for. Individual differences in working memory impact how well we can maintain this information and how susceptible we are to these price length effects.  So, let’s say I had a particularly diverse shopping cart this month with lots of items with long prices.  If my working memory isn’t that great, I’m not going to be very successful at estimating how much I spent.  In other words, I might not actually have that extra $10 for a burger and milkshake after all.  


Another individual difference that impacts cognition and mental accounting is our level of expertise with money.  Money is a fuzzy category.  It can include cash, credit cards, coins, different currencies, vouchers, gift cards, poker chips, paychecks, shares in stocks, gold bars, gambling tokens, and much more.  Our level of expertise with money influences our mental representation of it (Lotto, Rumiati, & Savadori, 2006).  For instance, people who are money experts, such as bankers, have a broader and more nuanced mental representation of money than non-experts, such as college students.  This means that bankers make finer distinctions between different types of money, while students are more basic in their mental representation of money (Lotto, Rumiati, & Savadori, 2006).  What does this mean for my trip to Shake Shack?  As a student and non-expert in all things money-related, I am likely to only think that I can pay for the burger and shake with whatever cash I have leftover or the remaining balance on a gift card. However, a banker’s ability to categorize different types of money means that her cognitive processes are more nuanced than mine.  For instance, she might choose to go to Shake Shack not because she has petty cash laying around, but because she earned $10 on a stock today.  



Mental accounting is complex.  Our ability to successfully manage mental accounts depends in large part on how we acquired the money, what form it takes, our working memory abilities, and our level of expertise.  But I’ve only scratched the surface here.  Mental accounting involves many other cognitive processes that bias our thinking – and our behavior – in one way or another.  So, how can we use this information to guide our spending and saving decisions?  Honestly, mental accounting seems pretty inevitable, and so are errors. However, if we can practice metacognition (i.e., thinking about our thinking), then we will be better aware of how differently we treat various forms and sources of money, even when their values are equal.  If we can recognize these influences, then we’ll not only be better off when it comes to making a trip to Shake Shack, but also when the stakes are little higher.  



Arkes, H. R., Joyner, C. A., Pezzo, M. V., Nash, J. G., Siegel-Jacobs, K., & Stone, E. (1994). The psychology of windfall gains. Organizational Behavior and Human Decision Processes, 59(3), 331-347. doi:10.1006/obhd.1994.1063

Helion, C., & Gilovich, T. (2014). Gift cards and mental accounting: Green‐lighting hedonic spending. Journal of Behavioral Decision Making, 27(4), 386-393.

Lotto, L., Rubaltelli, E., Rumiati, R., & Savadori, L. (2006). Mental representation of money in experts and nonexperts after the introduction of the euro. European Psychologist, 11(4), 277-288. doi:10.1027/1016-9040.11.4.277

Luna, D., & Kim, H. (2009). How much was your shopping basket? Working memory processes in total basket price estimation. Journal of Consumer Psychology, 19(3), 346-355. doi:10.1016/j.jcps.2009.03.003

Thaler, R. H. (1985). Mental accounting and consumer choice. Marketing Science, 4(3), 199-214.


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  1. nbzolper
    May 1st, 2017 at 22:50 | #1

    This was a great post! I find myself much more willing to spend money from gift cards or cash that relative give me than cash that I have earned myself! Mental accounting reminds me of something that we discussed in PS232: transfer appropriate processing. Transfer appropriate processing is that how you encode a memory and how you retrieve a memory impacts how well it is remembered. Do you think that transfer appropriate processing impacts which money I’m more willing to spend? For example, do I encode money that I make using semantic definitions (like how hard I worked to make that money) while only encoding money I’m given using phonetic definitions (like the actual value of it) and then when I am deciding to buy a burger I’m retrieving money on a phonetic level and therefore the money I encoded phonetically is more accessible?

  2. May 2nd, 2017 at 21:46 | #2

    Julia, awesome post! I saw another good post on mental accounting and the associated biases that come from different representations of money that used a great example from a study done by Psych legends Kahneman and Tversky (1984)http://blog.alphaarchitect.com/2014/09/04/behavioral-bias-bingo-mental-accounting/

    The scenario is you going to the movie theater with $10 vs a $10 gift card. Say you lose the gift card or the cash will you get another ticket? 46% would buy another ticket if they lost the gift card and 88% would buy another ticket if they lost the cash! Crazy to think about!

    I have studied sunk cost fallacy before and I think that these biases overlap in more ways than one. The sunk cost fallacy states that you are more likely to continue investing in a risky investment if you have already invested in it, and unfortunately this can escalate and become harmful. In the case of the gift card example, you might not see the gift card as a sunk investment since it has become a “hedonic” expense, while the $10 sunk can still be utilitarian. Other mental accounting experts such as yourself say that it is not the sunk cost fallacy at play but rather an inability to recognize the two types of money as equal.

    I’m curious if you think there is any cognitive overlap between these two financially harmful biases.

  3. May 3rd, 2017 at 10:30 | #3

    Really interesting post, Julia! Another key cognitive concept that I think really ties in with this is attention and activation over a threshold. For example, I go to the spa one morning and buy a $2 bagel. This might not be something I keep in memory both because it was such a small amount and because it was such a normal event. However, if I go mini-golfing and spend $15, that may activate the memory above the threshold more because I know I need to be saving money for other things and need to be aware I spent that much. Interestingly, in the end maybe those $2 bagels do end up hindering a budget more than the $15 mini-golfing adventure.
    I really enjoyed your tie into mental representations and how we imagine money as either fun or strict depending on the source. I think this brings up an important issue of how do we save money and perhaps change how we view money from certain sources? I found an interesting article explaining why mental accounting is important, it was actually written by the same person as one of your sources. One thing he mentions is how we can use mental accounting to achieve certain goals, such as setting a goal to save a certain amount, or setting aside a small fund for things like a burger and fries every now and then! http://faculty.chicagobooth.edu/richard.thaler/research/pdf/mentalaccounting.pdf

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