Mental accounting is a psychological concept in behavioral finance that refers to the way individuals categorize and evaluate different financial outcomes. Mental accounting influences people's financial decisions by affecting their perception of the value of money and the perceived importance of different financial goals.
For example, individuals may assign different values to different sources of income, such as their salary versus their investment returns. They may also treat money differently depending on how it was acquired, such as money won in a lottery versus money saved over time. These differing mental accounts can lead individuals to make suboptimal financial decisions, such as neglecting long-term financial goals in favor of more immediate spending.
In addition, mental accounting can also lead people to engage in mental budgeting, where they allocate money to different categories, such as housing expenses, entertainment, and savings. This type of mental accounting can make people feel as though they are spending within their means, even if they are not actually saving enough money to meet their long-term financial goals.
It is important to be aware of mental accounting biases and to make deliberate, rational financial decisions rather than relying on intuitive, emotionally-driven financial decisions.
