Definition
Mental Accounting: People irrationally partition money into mental accounts (e.g. “savings” “bonus” “pocket money” and treat equal amounts differently by source or use, leading to inconsistent spending and saving.[1]
Theoretical origin
Thaler (1985) formalized mental accounting and explained why “windfall–money is spent differently from “earned–money.[1]
Consumer decision patterns
Spending “saved–discount money, treating tax refunds as “free–money, continuing to invest in sunk costs. Marketing reinforces account boundaries with “dedicated funds–and “reward money–framing.
In Selection Logic
Rational choice should focus on cognitive budget and opportunity cost, not money’s label. Reducing mental accounting improves selection efficacy.
Mitigation
- Ask: Would I spend this way if the money came from salary?
- Use a single “total budget–and opportunity cost for decisions
- Avoid “earmarked money–thinking for high-stakes decisions