Mental accounting term
Mental accounting is a term used in behavioral economics to describe the way people categorize, value, and treat financial resources in their minds. It refers to the psychological processes that people use to organize and evaluate their financial resources, and make decisions about how to allocate and use them.
Mental accounting can influence how people perceive the value of money and make financial decisions. For example, people may place a higher value on money that they have earned through hard work or saved over time, compared to money that they have received as a gift or windfall. As a result, they may be more willing to spend the latter on discretionary or impulse purchases, while being more careful with the former.
Mental accounting can also lead people to make irrational or suboptimal financial decisions, such as being more willing to take on risk with money that they have won gambling, compared to money that they have saved over time. It can also lead people to make decisions based on arbitrary criteria, such as the source or form of the money, rather than on the overall value or return on investment.