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.
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But "mental accounting" would have prevented our investor from aggregatingemotional' returns, the equity allocation remaining a painful 8.
Confirmation bias makes us prone to disregard negative data about the option we are considering; overconfidence makes us consistently overestimate our chances of success; mental accounting makes us value equivalent outcomes differently depending on the way they are framed; and so on.
The theory which underlies the disproportional impact of the label on the labeled good is mental accounting (Thaler, 1990).
Some of the more common behavioral biases are overconfidence, conservatism, framing, mental accounting, herd instinct, anchoring and framing.
Take mental accounting. In Tomas' case, the P700 he saved falls under the category of Serious Money, on behalf of the company and his father's values.
Other works that dwell on the psychology of decision-making include Thaler (1999) who expounds the concept of mental accounting. The concept contends that people divide and categorize their funds into different non-exchangeable mental accounts.
Thanks to his work and others', we know a lot more about the biases and anomalies that distort our perception and thinking, like the endowment effect (once you own something you value it more than before you owned it), mental accounting (you think about a dollar in your pocket differently than you think about a dollar in the bank) and all the rest.
Usually, this phenomenon is attributed to mental accounting (e.g., Thaler 1980, 1985, 1999).
The reason for this is a phenomenon referred to as "mental accounting." (5) A mental account is a psychological frame for evaluation.
Concepts like "mental accounting," "hindsight bias" and "prospect theory" brought us face-to-face with our profound ignorance about what was really going on in the heads of our clients.
As part of this effect, a kind of "mental accounting" takes place: in deciding what to choose, people tend to weigh the "out of pocket" expense of giving up items that they own (their endowment) more highly than the potentially greater value of alternative or competing choices.
* 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.