Mental Accounting (explained in a minutes) – Behavioral Finance

The concept of “mental accounting,” which involves treating money differently based on its source or intended use. An example given is having a savings jar for special purposes while simultaneously carrying credit card debt, which is not financially sound. People tend to spend bonuses or gifts more freely than their regular income, even though money should ideally be treated uniformly. Some investors also engage in similar thinking by dividing their investments between safe and speculative portfolios, when holding one large portfolio would yield the same net wealth. In essence, the message is that money is money, regardless of its origin or purpose.