Mental accounting

Mental accounting refers to our tendency to categorise, compartmentalise and treat money differently depending on subjective criteria, such as where it comes from, where it is kept, or how it is spent. Mental accounting can be a useful tool when it comes to organising and keeping track of financial activity, but it can also lead to irrational financial behaviours. Richard Thaler, Professor of Behavioural Science and Economics at the University of Chicago, conducted pioneering research about this concept. For instance, he investigated why people have high-interest credit card debt and at the same time hold low-interest savings — a perfect example of mental accounting.