Mental Accounting


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Mental Accounting

A concept stating that investors and people divide up their current and future assets into different categories. These categories may be roughly thought of as "safety capital," which one uses to fulfill personal needs and make low-risk investments, and "risk capital," which one uses for high-risk transactions. Mental accounting is important to understanding certain investment decisions: rather than treating each unit of money as if it were exactly the same, people generally assign it into what they need and what they do not need. This effectively turns money, which is fungible, into something that is not fungible. See also: Behavioral economics.
References in periodicals archive ?
The underlying psychology behind this sort of mental accounting is an important open question.
The Mental Accounting Behavioral Economics principle (which refers to a person's tendency to bucket money based on its intended use) prompts Boomers to view Medicare Supplement Insurance as more confidence inspiring, and helps them reframe and justify its cost.
Mental accounting refers to one's ability to subjectively frame transactions in one's mind involving intertemporal consumption or saving decisions.
Burney is depicting, at work, a mental accounting process through which characters choose between immediate and delayed gratification.
This stupid investment mistake is called Mental Accounting.
Such a rule may be driven by mental accounting, where there is a hierarchy of money locations depending on how tempting it is for a household to spend the money in each, resulting in higher marginal propensity to consume out of cash or check receipts and lower propensity to consume out of planned savings, home equity, and future income (Shefrin and Thaler 1988).
The mental accounting (Thaler, 1985) argue that a human being, in a first step, segregate assets into different pockets and in a second step, he evaluates the risk of each asset and covariance between assets don't really matter.
We can explain the differences in asymmetric behaviour by two gifts, based on idea on mental accounting.
Mental accounting posits that individuals tend to evaluate risks in isolation, without appreciating the relevance of external factors--such as overall wealth and other risks to which one is exposed.
Mental Accounting Effect: You should have a diversified portfolio of different assets - stocks, bonds, property, commodities, cash etc so that portfolio risk is reduced.
This type of mental accounting, which depends on the grouping of gains and losses and the reference income a loss would be deducted from, could also explain why individuals do not agree on the tithing treatment of a capital gain on a house when a new house is purchased with the proceeds (question 4).
Information is often costly and expectations are less than fully rational in practice, being subject to influences such as framing and mental accounting (context of choices), immediacy (recentness of information), loss aversion, bias for the status quo, emotions and other non-utility-maximizing factors.