The Role of Mental Accounting in Household Spending and Investing Decisions

This chapter focuses on mental accounting within the context of consumer financial decision-making, examining how mental accounting influences budgeting, spending, and investment decisions. The categorization of funds into different groups is one of the defining elements of mental accounting. Categorizing funds helps facilitate the processing of information in ways necessary for evaluating spending opportunities. A wealth of evidence indicates that how funds are grouped and labeled influences individual preferences for spending. Receiving a raise today will lead to a greater increase in spending than will an increase in a future inheritance check of the same amount, even though standard economic theory suggests that people should treat wealth the same regardless of its source. Funds that evoke emotional feelings, particularly negative ones, are more generally spent on essential goods rather than luxury goods. An implication of prospect theory is that spending decisions can be driven not just by the market price of a potential purchase but also by how good of a deal that purchase would be