What is mental accounting? According to Investopedia, mental accounting is “…individuals divide their current and future assets into separate, non-transferable portions. The theory purports individuals assign different levels of utility to each asset group, which affects their consumption decisions and other behaviors.”1 In other words, it is a form of thinking where an individual allocates his/her resources into different, mutually exclusive categories, even though the resource (usually money) is the same thing and from the same source. It is applied commonly to personal budgets (e.g. meal budget, transport budget, etc.) and investments (e.g. The Bedokian Portfolio, trading portfolio, etc.). This concept was first mentioned by economist Richard Thaler, who had just won a Nobel Prize in Economics
Mental accounting is a form of bias, and it is one of the biases discussed in the field of behavioural economics and finance. Due to the …