Irrational Decisions
Richard Thaler won a Nobel prize for the concept, that shows how people categorize money into separate biased budgets rather than treating it as fungible
Taxpayers often manage this annual check from the government as "bonus cash" instead of regular wages
What is a tax refund?
Consumers usually mentally label this payment method as "different money" or delay the emotional impact, leading up to higher spending than when using physical cash
What is a credit card?
In a famous experiment, people who lost this item were much less likely to replace it than people who lost the equal cash
What is a movie ticket?
A piece of plastic or digital code that sits unspent in a drawer because people mentally lock it's value to a specific store or restaurant
What is a gift card?
This fallacy makes you continue to do an unrewarding action or project simply because you already invested time and money into it and also assigned it to a specific mental account
What is the sunk cost fallacy?
Rent collected from tenants or royalties from publish books are classic examples of this stream of income
What is passive income?
The term used when people treat all money the same of its origin or purpose
What is Fungible?
A person that might refuse to raid this rainy-day bucket even during actual predicament because it was strictly reserved for another purpose
What is an emergency fund?
A personal finance setup that divides money into three specific categories: core cash, long-term savings, and the third category for speculative fund
What is play money?
The term that describes how gamblers take bigger, illogical risk after winning early, because they mentally separate their winnings from their initial hard-earned stake
What is the house money effect?
Money earned from this type of secondary evening or weekend job is often put into a split mental category and spent on treats
What is side hustle income?
People are far more likely to spend this type of unexpected financial inflow like a tax refund or holiday bonus carelessly compared to regular wages
What is a windfall?
This emotional term clarifies why paying with cash hurts more psychologically than swiping a plastic card or digital token
What is the "pain of paying"?
Someone pays off a 5% savings account while they ignore a 20% credit card balance because we keep money in separate mental compartments
What are mental buckets?
In the classic mental accounting experiment, people that lost a $10 movie ticket refused to buy a new one and people who lost $10 cash still bought a $10 ticket
What is the lost ticket problem?
People are usually less careful with this type of money, its often won at casinos, compared to the money earned at a 9-5 job
What is house money?
While this is technically a bias, purposely setting up labeled sub-accounts can act as a positive self-control tool for these specific long-term achievements
What are savings goals?
This conundrum happens when consumers keep money in a low-interest savings bucket while concurrently maintaining high-interest debt
What is carrying credit card debt while holding savings?
Labeling some funds as "money for the kids" will often stop people from using it even during urgent situations or financial crisis
What is an emergency?
People who are more likely to illogically overspend on luxury items using some type of unexpected income because they put it in a "regular income" or "play money" mental category
What is a wind-fall gain?
In mental accounting experiments, people are far more likely to save regular paychecks than bonus checks of the same amount treating the bonus as this type of income
What is wind-fall income?
A beneficial strategy to counteract mental accounting to treat all assets as part of one unified component rather than ______
What is a portfolio?
Subscription services that manipulates mental accounting by doing this to payments, by separating the fee from the actual moment of consumption
What is payment decoupling?
What is a charitable donation?