Apr 25, 2023
You’re likely familiar with accounting, so perhaps you
can gather that mental accounting is essentially about how we
account for things in our mind. But, you may not realize that it
isn’t just mental math. This is about how we tend to create
separate accounts for things in our minds that feel concrete, but
often aren’t. When I give examples in this episode today, which
originally aired in the summer of 2019, you are going to find
yourself saying, “Well, obviously that is how it works!” And then
when you realize it doesn’t have to be that way…it's kind of
mind-blowing, but in a good way.
Mental accounting is great in a lot of ways. It helps
us to save money and prioritize things that we might have a harder
time with if everything was all lumped together. But it doesn’t
mean it is the ONLY way or even the right way. It might just be the
best way our brains are doing it right now, and it is always a good
thing when you can know the rules your brain is using to make its
decisions as well as that of your employees, peers, customers, and
So, why are we talking about mental accounting today?
It’s because this Friday I am joined by Dr. Merle van den Akker, an
expert on psychology and personal finances who runs the Money on
the Mind blog. When she is here on Friday we discuss how the stress
of money (fear of losing a job, concern about inflation, and the
like) can impact employees. And, we of course take it a step
further to unpack what businesses should know about these topics to
better support their employees and why, even if a company thinks
this doesn’t have anything to do with them…it absolutely does. This
kind of stress has a lot of economic impact on an organization, and
it doesn’t have to be difficult to support employees and achieve
that win-win. We specifically talk about mental accounting in the
episode, making it the perfect time to refresh it and get you set
up for success for Friday!
- [01:21] Our brains make rules all the time. Sometimes
they are really valuable — mental accounting is a great thing in a
lot of ways. Sometimes, they aren’t necessarily serving us
- [03:21] The concept of mental accounting was
introduced by Nobel Prize winner Richard Thaler and is based on a
human’s illogical approach to value in relative terms instead of
looking at it as an absolute.
- [06:00] Three examples of how mental accounting can
impact the decisions we make. This concept is very ingrained in our
- [08:22] Money is commonly labeled as either:
expenses, wealth, and income.
- [10:48] Much like regular accounting in mental
accounting, individuals will book and post any occurring or planned
transactions to the mental account. However, small items may not be
booked in the same way as a big item would be. As long as it is
below a certain amount it doesn’t have to hit the mental
- [12:38] We often don’t look at dollar bills and
change the same.
- [15:31] Similar to the process of rounding up change
at the grocery store, adding a small amount to an already large
payment doesn’t feel the same as having that payment on its own.
This is because of decoupling.
- [17:07] Vacations are enjoyed more when they are
prepaid because it feels free.
- [19:06] There are times when prepayment is necessary
and beneficial for the overall enjoyment of an
- [22:34] When prepayment comes into play the impact of
the payment gets completely wiped off the mental accounting sheet
so its impact on the sheet becomes zero.
- [25:11] Instead, internalize how the brain is wired
to make its decisions around mental accounting.
- [27:49] When it comes to wealth in these sorts of
categories people are very influenced by paper gains and
- [29:26] Where you keep the money mentally or
physically matters, but it also matters how you came across the
money in question.
- [30:53] The way you receive the dividend impacts your
willingness to spend it.
- [32:17] While it is easier to give cash than gifts,
in many cases when the gift given is something someone really likes
or enjoys it can have a greater value than giving cash.
- [34:08] While losses should be lumped together, gains
should be separated out to really feel their value. Don’t wrap all
the Christmas presents in one box.
- [35:14] Mental accounting affects more than just
- [37:52] Context is important in the way people
- [39:54] Talking on the phone is more enjoyable when
you aren’t worried about how much it is going to cost
- [41:57] If you struggle with work-life balance and
want to make more time for yourself, your family, or date night,
consider how the mental accounts for money were set up.
- [43:47] Try to take a step back and have perspective
on what’s a waste of time and how you could better allocate your
mental time account.
- [44:25] Melina’s closing thoughts
Thanks for listening. Don’t forget to subscribe
Podcasts or Android.
If you like what you heard, please leave a
review on iTunes and share what you liked about the
I hope you love
everything recommended via The Brainy Business! Everything was
independently reviewed and selected by me, Melina Palmer. So you
know, as an Amazon Associate I earn from qualifying purchases. That
means if you decide to shop from the links on this page (via Amazon
or others), The Brainy Business may collect a share of sales or
More from The Brainy Business:
Check out Melina’s award-winning
Get the Books Mentioned on (or related to)
Top Recommended Next Episode: Pain of Paying
Already Heard That One? Try
Other Important Links: