Mental Accounting

Definition

Mental accounting is a theory that describes how people think about money. This theory suggests that people track and coordinate their financial activities by partitioning money into mental accounts, which are used to make spending decisions. Examples of mental accounts might include an “entertainment account” or an “education account,” each representing money specifically budgeted for that endeavor.

Mental accounting represents a shift from traditional economic theory, which suggests that people think about their assets as a single account representing their total state of wealth. According to economic theory, spending decisions are based on a purchase's utility relative to all other potential purchases. Mental accounting instead suggests that spending decisions are based on utility relative only to other purchases in the relevant account.

Background

The concept of mental accounting ...