Posts Tagged ‘mental accounting’

Assorted links

February 1, 2010





Have you noticed any more money in your paycheck?

August 19, 2009



Why is it so hard to get a cab on a rainy evening?

August 12, 2008

Thaler says mental accounting. As with financial accounts, people need to close their mental books and balance their accounts. But people in different professions unconsciously balance their books at different times. Standard wage employees may balance books on a biweekly or monthly basis, which is typically when they get paid. Cab drivers, in contrast, balance their mental books every day. Since business is brisker in the rain, once drivers hit their mental income targets for the day, they go home, leaving fewer cabs when you really need them.

The behavioral economics behind free gas

July 30, 2008



The a la carte method for saving money

June 19, 2008

Ramit Sethi has an interesting blog post, “The A La Carte Method: Use Psychology Against Yourself to Save Money.” The method, which Sethi, author of the forthcoming I Will Teach You to Be Rich, says was partially inspired by ideas in Nudge, instructs wannabe savers to cut out major subscriptions in their lives (Netflix, cable, gym, magazines, Amazon Prime, fruit of the month, etc.) and instead pay for them one visit or item at a time, preferably using cash. (It’s similar to the paygo idea in politics where politicians promise to spend money on programs only when they have guaranteed tax revenue to fund them.) A la carte succeeds by making costs salient, at the small cost of making life less automatic.

Continue reading the post here.

Dustin Hoffman’s mental accounting

May 27, 2008

If you want some insight into how humans create and handle budgets, you could read about the theory of mental accounting as described by Thaler in his paper “Mental Accounting Matters“:

Expenditures are grouped into budgets (e.g. food, housing, etc.)…Such accounts would be inconsequential if they were perfectly fungible (i.e. substitutable) as assumed in economics. But, they are not fungible, and so they ‘matter’…Dividing spending into budget categories serves two purposes. First, the budgeting process can facilitate making rational trade-offs between competing uses for funds. Second, the system can act as a self-control device. Just as organizations establish budgets to keep track of and limit divisional spending, the mental accounting system is the household’s way of keeping spending within the budget…

Whenever budgets are not fungible their existence can influence consumption in various ways. One example is the case in which one budget has been spent up to its limit while other accounts have unspent funds remaining. (This situation is common in organizations. It can create extreme distortions especially if funds cannot be carried over from one year to the next. In this case one department can be severely constrained while another is desperately looking for ways to spend down this year’s budget to make sure next year’s is not cut.)

Etc. Etc.

Or you could just watch Gene Hackman tell this story about loaning money to Dustin Hoffman.


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