Mental Accounting

Psychology plays a remarkable role in human life. One particularly interesting concept is mental accounting, also known as psychological accounting. Don’t worry, we’re not changing the focus of our website. For instance, it’s intriguing to consider how even a small, unexpected win can sometimes influence our behavior.

Are Humans Rational?

In economics and other fields, the concept of the "rational human" is often discussed. According to this theory, people always act rationally, optimizing their income and expenses. However, in reality, this is not always the case.

American psychologist Richard Thaler introduced a phenomenon known as mental or psychological accounting (originally termed mental accounting or psychological accounting). Traditional accounting, as an economic or financial discipline, records income and expenses without considering the circumstances under which they occurred.

In contrast, people tend to assign different values to different sources of income and expenses. This depends on how easily or how hard the money was obtained, and they make spending decisions accordingly.

Hard-earned money is typically spent more cautiously, whereas easily earned money or unexpected windfalls are much more likely to be spent freely, often without regret.

If people behaved like machines, accounting software, or strictly rational beings, then income would simply be income, and expenses would just be expenses—free from emotions or psychological attachments. They would spend based on necessity, following a structured budget, without linking expenses to whether the money was hard-earned or easily obtained.

Figure 1: Mental Accounting Illustration (source: Craiyon)

Unexpected Small Wins and Surprise Income

Chances are, you’ve engaged in mental accounting at some point in your life—perhaps without even realizing it. What happens when you receive an unexpected but small win or a surprise bonus at work?

The first thing that might come to mind is buying something nice for yourself—treating yourself—without worrying too much about whether you actually need it. Since the money was unexpected, you feel like spending it doesn’t really affect anything.

For example, let’s say you win $ 200 to $300 in a lottery or receive an unexpected work bonus of the same amount. You might decide to buy shoes you previously thought were too expensive. Later, you might get new clothes, go to the theater, the movies, and so on—after all, you won, so you deserve to treat yourself.

Unexpected income tends to stimulate spending, sometimes without people even realizing it. As a result, you may end up not just spending your original winnings or bonus but even multiplying your expenses—essentially creating a "spending spree" that wouldn’t have happened without the unexpected windfall. People tend to overlook the fact that they’ve already spent the extra money—engaging in mental rather than traditional accounting.

Cash vs. Cashless Payments and Betting

Another aspect of mental accounting involves cash payments versus card payments or other cashless transactions. You may have noticed that when you pay with a card, you tend to spend more, as it doesn’t feel as painful as handing over physical cash.

The same principle applies to betting. If you place bets online or pay with a card, you’re more likely to place higher wagers than if you were betting with cash. Just like with shopping, electronically deducted funds don’t have the same psychological impact as physically handing over banknotes from your wallet or pocket.

You Might Be Also Interested

• Investment Triangle Golden Rule;
• Stocks: Basics You Need to Know;
• Bonds: A Complete Guide to Understanding Bonds;
• Bitcoin: A Comprehensive Guide;
• Is Buying Stocks a Game of Chance?
• Commodities: A Comprehensive Guide;
• Gold as a Safe Haven: Navigating Turbulence;
• Price of Gold Surpassed the Historic Record from August 2020 (2023-12-04);
• Silver in Modern Society;
• Copper as a Barometer of the State of the Economy;
• Dividend: What It Is and How to Get Them;
• Inflation: How to Protect Against It.

Based on the original Czech article: Mentální či psychologické účetnictví – co je, příklady.