An assessment of the effects of mental accounting on overspending behaviour: An empirical study

Abstract Over 40% of American households always feel like they are overspending and they regret their choices. However, these consumers are unaware of the type of overspending they follow. Such overspending behaviours include income overspending (a consumer spends more than his or her earned income), expected overspending (a consumer spends more than expected in a “normal” year) and credit overspending (a consumer does not pay off credit card balances). The study aims to explore how overspending behaviours are affected by the mental accounts of wealth, saving goals and expense forecasting. Using data from the 2016 Survey of Consumer Finances, the study describes overspending behaviour associated with three types of mental accounts. The study reveals that expected overspending is affected by expenditure forecasts and wealth allocation while credit overspending is affected by wealth allocation only. Income overspending is influenced by wealth allocation, expenditure forecasts and savings goals. These findings have important implications for consumers and finance professionals. Furthermore, the study reveals the important influence of consumer demographic characteristics on overspending behaviours by showing that certain types of consumers have a higher propensity to overspend.