Jul 12, 2019
Hopefully, you tuned in last week for the special anniversary
episode, where I went over the top episodes by downloads, your
votes and some of my favorites. I also gave some of my book
recommendations and a sneak peek behind the scenes with the top
questions I get asked, the weird thing I hear all the time now…and
so much more.
Today, we are back into the swing of things with a behavioral
economics foundations episode on mental accounting. This concept
was mentioned briefly in the biases series, but today we are going
to dig into what this really is and just how much it impacts our
approach to money, risk, time and more.
- [05:02] The concept of mental accounting was introduced by
nobel prize winner Richard Thaler, and is based on humans’
illogical approach to value in relative terms instead of looking at
it as an absolute.
- [05:31] Three examples by Richard Thaler of mental
- [07:41] These are all examples of the way that mental
accounting can impact the decisions we make.
- [08:17] Money and accounts should be perfectly fungible (that
is an economics term for interchangeable). It shouldn’t matter if
money was in a savings account, or a checking account or your
pocket or a 401k…it would all exchange exactly the same.
- [09:32] Our brain segregates when thinking about money. This is
one of the reasons the field of behavioral economics was
needed…traditional economics does not account for the importance of
- [10:10] The three ways money is commonly labeled: expenses are
grouped into budgets like food, rent, and entertainment. Wealth is
separated into accounts (checking, emergency or “rainy day” funds,
and retirement). And lastly income is looked at in categories:
namely regular or windfall.
- [12:35] Much like regular accounting, in mental accounting,
individuals will book and post any occurring or planned
transactions to the mental account.
- [15:59] When businesses are reporting their year-end earnings
and losses, they always want to have a positive year end, which
could make it tempting to hold on to losses until the next
- [16:42] If you are looking like you are going to have a bad
year and have no option but to take a loss, general wisdom is to
throw in as much negative and expense as you can. If it is going to
be negative, might as well have it all come in at once. (Known as
“taking the big bath”)
- [17:13] 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 – where you remove the pain of the payment
away from the joy of the purchase.
- [18:28] There are some times where people significantly prefer
to prepay over delaying their payments. Vacations are enjoyed more
when they are prepaid because they feel free.
- [24:10] The way the consumer uses their mental accounting
transforms something that can be very expensive hobby (like wine
collecting) into one that is seen as free.
- [25:24] People can and often do plan for expenses in one way
and experience it completely differently in the moment.
- [26:57] Internalize how the brain is wired to make its
decisions around mental accounting. Think about how this has
impacted you and how it can impact your customers.
- [27:52] Expenses are thought about in budgets, and wealth is
considered in accounts.
- [28:03] The most tempting and easiest accounts to spend from
are the current assets, this is your checking account and physical
- [28:13] It's less tempting to spend from the current wealth
category, which is made up of other liquid assets – savings
accounts, stocks, bonds, and mutual funds.
- [28:33] The next, even less tempting category is equity (like
that in a home or car you own). Future income is the least tempting
category. These are your retirement accounts.
- [29:27] Those who have issues with self control should set up
accounts that are off limits and put together automatic transfers
so they are not tempted.
- [31:03] An example of losing a movie ticket and losing $10 that
shows when the loss is associated with the outing to the movies, it
is aversive, but when it is not associated with the outing, it is
still annoying, but doesn’t impact the mental account for the
- [31:22] Money that you earn in your paycheck is considered
different than money you win in the lottery or find on the
- [32:58] How will the mental account allocation impact the way
the gift is used? And how does that line up with the intention
behind the gift?
- [35:54] 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.
- [36:26] Brands can use mental accounting to their advantage in
the way they advertise products. How can you use this frame on
mental accounting in your business?
- [37:03] Mental accounting impacts more than
- [39:43] Context is important in the way that people react.
- [42:53] Being aware of how the sausage is made can impact your
enjoyment of it. Keep this in mind when you present pricing to
- [43:10] One other scarce resource impacted by mental accounting
- [43:41] Labeling time as only in the “family time” account
makes it so “work time” isn’t even in the consideration of what to
do on Saturday morning.
- [45:20] Are there times where you are wasting high value
productive time? Take a step back and think about how you could
better allocate your mental time account.
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