"As Thaler puts it, 'All organizations, from General Motors down to single person households, have explicit and/or implicit accounting systems. The accounting system often influences decisions in unexpected ways.'"
The tendency for people to treat money differently based on the source, timing, and form of the money.
Mental accounting: This is the central concept of behavioral economics and refers to the way people mentally separate their financial resources into different categories based on subjective criteria.
Anchoring and adjustment: This refers to the tendency for people to rely too heavily on an initial piece of information (the "anchor") when making subsequent judgments or decisions.
Sunk costs: This refers to the tendency for people to continue investing in an activity or project even if it is not profitable, simply because they have already invested time, money, or effort into it.
Prospect theory: This is a model of decision making that explains why people tend to value losses more than equivalent gains, and why they are risk-averse when faced with gains but risk-seeking when faced with losses.
Framing effects: This refers to the way in which the same information can be presented in different ways, leading to different judgments and decisions.
Mental accounting and savings: This refers to the way people mentally allocate their income into different categories, such as "spending money" and "savings," and how this can impact their ability to save effectively.
Mental accounting and spending: This refers to the way people mentally allocate their resources when making spending decisions, and how this can lead to irrational or suboptimal choices.
Mental accounting and debt: This refers to the way people mentally allocate their debt, and how this can impact their ability to pay off debt effectively.
Mental accounting and investing: This refers to the way people mentally allocate their investments, and how this can impact their investment decisions and risk tolerance.
Mental accounting and taxation: This refers to the way people mentally allocate their taxes, and how this can impact their tax planning and compliance.
Mental accounting and philanthropy: This refers to the way people mentally allocate their charitable giving, and how this can impact their giving behavior and sense of social responsibility.
Mental accounting and health: This refers to the way people mentally allocate their resources when making decisions about their health and healthcare, and how this can lead to suboptimal health outcomes.
Mental accounting and happiness: This refers to the way people mentally allocate their resources when pursuing happiness, and how this can impact their life satisfaction and well-being.
Mental accounting and intertemporal choice: This refers to the way people mentally allocate resources over time, such as their income, savings or debt, and how this can impact their decisions in the present and the future.
Mental accounting and other economic concepts: This refers to how the concept of mental accounting can be used to analyze and explain other economic concepts, such as utility, risk, and pricing.
Budgeting mental accounting: Refers to setting and sticking to a specific budget for various expenses.
Invisible mental accounting: Refers to money that we don't see or forgot about for a while can diminish its value.
Pain of paying mental accounting: Refers to the emotional response people have when they pay for something, regardless of the price or value.
Saving mental accounting: Refers to setting aside money specifically for savings goals.
Permission-based mental accounting: Refers to allowing ourselves to spend more money on something when we believe we have earned it.
Long-term/short-term mental accounting: Refers to the way we differentiate between money for long-term goals, such as retirement or education, versus money for immediate or short-term needs.
Weighing the pros and cons mental accounting: Refers to considering the pros and cons of a purchase, including potential future benefits or losses.
Used for trade mental accounting: Refers to budgeting money for a specific expense, such as groceries or entertainment.
Future-value mental accounting: Refers to thinking about how much different investments will be worth in the future.
Mental accounting for bonuses and windfalls: Refers to using unexpected or windfall money for a particular purpose, such as paying off debt.
"Mental accounting is a model of consumer behavior developed by Richard Thaler."
"Mental accounting incorporates the economic concepts of prospect theory and transactional utility theory."
"Mental accounting...impacts the buyer decision process and reaction to economic outcomes."
"People are presumed to make mental accounts as a self-control strategy to manage and keep track of their spending and resources."
"People budget money into mental accounts for savings (e.g., saving for a home) or expense categories (e.g., gas money, clothing, utilities)."
"People also are assumed to make mental accounts to facilitate savings for larger purposes (e.g., a home or college tuition)."
"Mental accounting can result in people demonstrating greater loss aversion for certain mental accounts, resulting in cognitive bias."
"Cognitive bias...incentivizes systematic departures from consumer rationality."
"Through increased understanding of mental accounting differences in decision making based on different resources, and different reactions based on similar outcomes can be greater understood."
"Particularly, individual expenses will usually not be considered in conjunction with the present value of one’s total wealth; they will be instead considered in the context of two accounts: the current budgetary period and the category of expense."
"People can even have multiple mental accounts for the same kind of resource."
"A person may use different monthly budgets for grocery shopping and eating out at restaurants, for example, and constrain one kind of purchase when its budget has run out while not constraining the other kind of purchase."
"Both expenditures draw on the same fungible resource (income)."
"One detailed application of mental accounting, the Behavioral Life Cycle Hypothesis posits that people mentally frame assets as belonging to either current income, current wealth or future income."
"Account are largely non-fungible and marginal propensity to consume out of each account is different."
"The accounting system often influences decisions in unexpected ways, from General Motors down to single person households."
"Mental accounting incorporates prospect theory and transactional utility theory, while traditional accounting focuses more on objective financial evaluation."
"People are presumed to make mental accounts as a self-control strategy to manage and keep track of their spending and resources."
"People also are assumed to make mental accounts to facilitate savings for larger purposes, such as a home or college tuition."