Mental Accounting
Treating money differently depending on its source or intended use, rather than as fungible.
How it is identified
Test: identical amounts are treated differently according to which mental category they occupy
Unit
qualitative
In depth
Thaler's concept explains why people hold a savings account earning 3% while carrying credit card debt at 40%, and why gains from a windfall are risked more freely than salary. Money is fungible in fact and not in feeling, and the categories people impose lead to decisions that are locally sensible and globally wrong. Its useful side is that goal-based buckets help people save and stay invested, so the bias can be harnessed rather than only corrected. The harmful side is the failure to see the portfolio as one entity, which produces duplicated exposure and unmanaged overall risk.
Worked example
An investor treats a ₹3,00,000 bonus as house money and puts it in a small-cap on a tip, while managing salary savings conservatively. Both amounts buy identical assets at identical prices and carry identical risk.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Mental Accounting” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.