Definition, founder

Accounting, which is often considered the language of business, cannot be

separated from the way it works our own mind. Everyone turns out have a way of
working the mind called soul accounting. This mental accounting showing very
high with accounting systems developed and used in the business world. Method
Mind work based on mental accounting will have implications for decision making
at the individual level as well as organizations or companies.

How we tend to assign subjective value to our money, usually in ways that against
basic economic principles.

Often leads people to make irrational investment decisions and behave in

financially counterproductive (against )or detrimental (irritate/destruct) ways.

Sale on shopee 10.10 bonus/

Where do this bias occurs

Imagine you’re walking down the street, and you happen to find a $100 bill lying
on the sidewalk. Ordinarily, you’re a pretty frugal person, and you’ve been trying
to save some money to put towards buying a car in the future. Today, however,
you take your newfound $100 and put it towards an expensive dinner. You tell
yourself that this money isn’t “car money” — this is a one-off, special occasion, so
why not treat yourself to a nice evening out?

Underlying theory

Underlying the theory is the concept of fungibility of money. To say money is

fungible means that, regardless of its origins or intended use, all money is the
same. To avoid the mental accounting bias, individuals should treat money as
perfectly fungible when they allocate among different accounts, be it a budget
account (everyday living expenses), a discretionary spending account, or a wealth
account (savings and investments).

They also should value a dollar the same whether it is earned through work or
given to them. However, Thaler observed that people frequently violate the
fungibility principle, especially in a windfall situation. Take a tax refund. Getting a
check from the IRS is generally regarded as "found money," something extra that
the recipient often feels free to spend on a discretionary item. But in fact, the
money rightfully belonged to the individual in the first place, as the word "refund"
implies, and is mainly a restoration of money (in this case, an over-payment of
tax), not a gift. Therefore, it should not be treated as a gift, but rather viewed in
much the same way that the individual would view their regular income.

FOR EXAMPLE : …….TICKET AND MONEY

Effects

Examples

Reasons lead to bad decisions abt money :

1. Give money mental labels

Fungible : sepadan.  the right to exchange a product or asset with other

individual products or assets of the same kind.

Money made up of units that are all interchangeable and indistinguishable from
one another, doesn’t come with any labels. Tend to treat money as lees fungible
than it is.

2. Idea of transactional utility/“Good deal”

There are certain venues where one can expect to pay much more for the same
product than one would elsewhere. Willingness to pay
3. We perceive gains and losses differently depending on their framing
 Framing theory means that the way a person subjectively frames a
transaction in their mind will determine the utility they receive or
expect.
 the way an option is described can have a major impact on our decision-
making.

The scenario described in the calculator study is an example of a “topical frame”:

the situation is worded in terms of the price of the calculator.5 This causes people
to perceive the gain of $5 relative to the base price of the calculator. When the
calculator ordinarily sells for $15, getting $5 off seems like a great deal, but $5 off
a $125 seems like a much smaller gain.

 whether they are integrated or segregated—in other words, whether they

happen altogether, or are spread out over separate events. 

when buying something expensive like a new car, salespeople often try to tack on
“extras,” such as paint protection and entertainment systems. Because these
smaller losses are integrated into the much bigger loss of buying the car itself, we
don’t feel like it’s such a big deal, and are much more vulnerable to springing for
additions we don’t need.

How to avoid

1. Create a household budget

make an outline of all your expenses, and how much you would ideally spend in
each category. There are many online budgeting tools to help with this.

start by tracking your normal spending for a month: make a note anytime you buy
something, as well as when you receive any income. By putting numbers to your
financial situation, you might be able to see it in a different light. It might not feel
like a big deal to pocket all your tips as “free money,” but when you’re keeping
track, you may realize that that cash adds up more than you thought it did.
2. Make a plan for unexpected income
Tax returns are a good example: even though we know to expect a tax return every
year, we never know exactly how much it will be, and therefore can’t specifically
budget for it. Then, when we do receive that money, it feels like “extra” cash, and
becomes easy to spend all at once. one might decide to put half of that tax
return money into a savings account, and spend half on a treat of some kind.

Conclusion

began with an attempt to understand why people pay attention to sunk costs (costs
with little or no potential for profit in the future
) , why people are lured by bargains into silly expenditures, and why people will
drive across town to save $5 on a small purchase but not a large one.

They buy things they don't need because the deal is too good to pass up. They quit
early on a good day. They put their retirement money in a money market account.

tips on how to do a better job of saving and investing. Many of the tips he later
published had a strong mental accounting flavor.

An economist might argue that it would be even less painful to just write a check
once a year and send it to his mutual fund. But that would miss the point: mental
accounting matters.