Mental Accounting
Mental accounting refers to the tendency of individuals to mentally compartmentalize their money into various categories or accounts based on subjective criteria rather than viewing it as a single, fungible pool. Understanding this concept is important as it can influence how people make financial decisions and allocate their resources.
By recognizing and managing mental accounting biases, individuals can make more informed and effective financial decisions, leading to better budgeting, planning, and goal achievement.
Example: Treating gift cards differently than cash. Individuals might be more likely to spend a gift card on non-essential items because they view it as "free" money.
Areas it can help in: Financial planning, Credit card spending, Investments, Budget allocation
