{"id":3136,"date":"2017-04-17T20:35:29","date_gmt":"2017-04-18T00:35:29","guid":{"rendered":"http:\/\/web.colby.edu\/cogblog\/?p=3136"},"modified":"2017-09-06T12:09:57","modified_gmt":"2017-09-06T16:09:57","slug":"sure-i-can-afford-it-the-cognitive-principles-behind-mental-accounting","status":"publish","type":"post","link":"https:\/\/web.colby.edu\/cogblog\/2017\/04\/17\/sure-i-can-afford-it-the-cognitive-principles-behind-mental-accounting\/","title":{"rendered":"Sure, I can afford it: The cognitive principles behind mental accounting"},"content":{"rendered":"
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imgflip.com\/memegenerator<\/p><\/div>\n

I could really go for a burger and milkshake right now. \u00a0It\u2019s the end of the month; rent has been paid, my student loan contribution is accounted for, and I\u2019ve maxed out my self-imposed monthly restaurant allowance. It looks like I\u2019m out of luck. \u00a0But, after some quick mental math, I realize that I spent $10 less than expected on groceries this month. \u00a0Score! \u00a0It\u2019s burger time. We\u2019ve all done this: designating money for specific purposes, guesstimating how much we\u2019ve spent, and mentally moving money around when convenient. \u00a0These behaviors, among others, are what psychologist Richard Thaler (1985) calls \u201cmental accounting.\u201d \u00a0Mental 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. \u00a0Indeed, there was nothing concrete about my monthly restaurant allowance or grocery budget. \u00a0They were simply my personal mental accounts. \u00a0In other words, mental accounting helps us organize our spending behaviors. \u00a0It\u2019s not just about budgeting, though. \u00a0Categorizing 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.<\/p>\n

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So, what determines whether we\u2019re taking that trip to Shake Shack? \u00a0It\u2019s not quite as simple as mentally moving that grocery money to the restaurant account. \u00a0Buying the burger and milkshake likely has a lot to do with <\/span>how<\/span><\/i> we\u2019re paying for it. \u00a0Now 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. \u00a0This $10 feels a lot different than $10 from my salary, even though both are earned, right? \u00a0How 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\u2019s fun spending money), and this difference has <\/span>consequences for our behavior<\/span><\/a>. \u00a0In 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. \u00a0<\/span><\/p>\n

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wheelofpersuasion.com<\/p><\/div>\n

Okay, here comes another wrinkle: What if the $10 was in the form of a Shake Shack gift card instead of cash or credit? \u00a0The answer to this question has to do with how we categorize purchases. \u00a0For instance, \u201chedonic\u201d items are considered fun and enjoyable; \u201cutilitarian\u201d items are considered functional and practical. \u00a0Clearly, 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). \u00a0Ultimately, though the <\/span>value<\/span><\/i> 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. \u00a0<\/span><\/p>\n

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To be sure, it\u2019s not just a mentally malleable budget, methods of monetary acquisition, and the form that money takes that impact consumer behavior. \u00a0There are also individual differences that influence cognition and mental accounting. \u00a0For instance, let\u2019s 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. \u00a0Determining that I had that \u201cextra\u201d money required me to mentally sum what I had spent on groceries that month. \u00a0The accuracy of my guesstimate in part depends on the price lengths of the items I purchased (Luna & Kim, 2009). \u00a0Let\u2019s back up for a moment here. \u00a0When price lengths are shorter (e.g., \u201ctwenty-one dollars\u201d is shorter than \u201ctwenty-seven dollars and forty-three cents\u201d), we can maintain more information in working memory. \u00a0Working memory is a short-term memory system that allows us to process, integrate, and use information by allocating resources to various subsystems. \u00a0The subsystem most responsible for maintaining prices of different lengths is the phonological loop. \u00a0Longer price lengths result in less accurate estimates because more digits require more time to be processed in the phonological loop (Luna & Kim, 2009). \u00a0Luckily, 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). \u00a0Therefore, by \u201cchunking\u201d 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. \u00a0So, let\u2019s say I had a particularly diverse shopping cart this month with lots of items with long prices. \u00a0If my working memory isn\u2019t that great, I\u2019m not going to be very successful at estimating how much I spent. \u00a0In other words, I might not actually have that extra $10 for a burger and milkshake after all. \u00a0<\/span><\/p>\n

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Another individual difference that impacts cognition and mental accounting is our level of expertise with money. \u00a0Money is a fuzzy category. \u00a0It can include cash, credit cards, coins, different currencies, vouchers, gift cards, poker chips, paychecks, shares in stocks, gold bars, gambling tokens, and much more. \u00a0Our level of expertise with money influences our mental representation of it (Lotto, Rumiati, & Savadori, 2006). \u00a0For 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. \u00a0This 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). \u00a0What does this mean for my trip to Shake Shack? \u00a0As 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\u2019s ability to categorize different types of money means that her cognitive processes are more nuanced than mine. \u00a0For 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. \u00a0<\/span><\/p>\n

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freefoodboston.wordpress.com<\/p><\/div>\n

Mental accounting is complex. \u00a0Our 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. \u00a0But I\u2019ve only scratched the surface here. \u00a0Mental accounting involves <\/span>many other cognitive processes that bias our thinking<\/span><\/a> – and our behavior – in one way or another. \u00a0So, how can we use this information to guide our spending and saving decisions? \u00a0Honestly, 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. \u00a0If we can recognize these influences, then we\u2019ll not only be better off when it comes to making a trip to Shake Shack, but also when the stakes are little higher. \u00a0<\/span><\/p>\n

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References <\/span><\/p>\n

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

Helion, C., & Gilovich, T. (2014). Gift cards and mental accounting: Green\u2010lighting hedonic spending. <\/span>Journal of Behavioral Decision Making, 27<\/span><\/i>(4), 386-393.<\/span><\/p>\n

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

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

Thaler, R. H. (1985). Mental accounting and consumer choice. <\/span>Marketing Science, 4<\/span><\/i>(3), 199-214. <\/span><\/p>\n

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I could really go for a burger and milkshake right now. \u00a0It\u2019s the end of the month; rent has been paid, my student loan contribution is accounted for, and I\u2019ve maxed out my self-imposed monthly restaurant allowance. It looks like I\u2019m out of luck. \u00a0But, after some quick mental math, I realize that I spent […]<\/p>\n","protected":false},"author":5502,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ngg_post_thumbnail":0,"footnotes":""},"categories":[130416],"tags":[54559],"_links":{"self":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/3136"}],"collection":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/users\/5502"}],"replies":[{"embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/comments?post=3136"}],"version-history":[{"count":6,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/3136\/revisions"}],"predecessor-version":[{"id":3152,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/posts\/3136\/revisions\/3152"}],"wp:attachment":[{"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/media?parent=3136"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/categories?post=3136"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/web.colby.edu\/cogblog\/wp-json\/wp\/v2\/tags?post=3136"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}