Are You A Mental Accountant?

I hope most of you have had a chance to read my previous article about The Legend of the Man in the Green Bathrobe. If you haven’t, go back and read it. It’s a prerequisite for continuing this post.

I anticipated what the responses would be in the comments before they came rolling in. I assumed that few would openly admit to mental accounting, not because they are intentionally lying but because they aren’t aware of their guilt. It’s easy to read about the wild gambler and say “if I won over a million dollars, of course I would treat it like real money and keep it.” So let me give you a different scenario.

Let’s say for Christmas you received $50 from your mom (it can be cash or a gift card) – this already seems more realistic. What did you do with the $50 gift? Did you go out and spend it on something you’ve been wanting or did you remain disciplined and deposit the $50 into the bank, as if it were earned? I would guess more than a hand-full of my readers (since I only have 6 readers, a hand-full is  83%) that said they weren’t guilty of mental accounting naturally treated this gift differently than earned income. Don’t believe me?

You Can’t Handle the Proof

Years ago, a few Harvard psychologists experimented with some Harvard students. The students were told they would receive $25 in return for their participation in a research project. They were told they could spend the $25 at the school store (on random goods – not necessities) and anything they didn’t use would come back to them as cash (to use anywhere). Half of the participants were told the $25 was a rebate and half were told the $25 was a bonus.

The Results

• 84% of the students that received a “bonus” spent some or all of their money in the school store.
• 21% of the students that received a “rebate” spent money at the store.

Coincidence? I don’t think so, Tim.

One of the researchers Nick Epley put it perfectly when he said:

Reimbursements send people on trips to the bank. Bonuses send people on trips to the Bahamas.

If you don’t admit to mental accounting now, don’t worry, I’ll get you soon.

Tagged as: behavioral economics, mental accounting