What is Mental Accounting - How to do Self-Control?

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Have you ever heard about Mental Accounting and Self Control? This topic has become my personal favorite concept. Richard Thaler’s work on the idea of mental accounting is that people have separate accounts in their mental being for everything and they spend everything from that account treating different things differently. People don’t treat all of their money or time or effort or other resources as if they have one big pool of it. Instead, they have separate mental accounts, and when they spend money or time or effort they keep track of it based on the mental account it came from. These accounts are typically very much individual in nature and majorly based on people’s goals for their own lives.

This concept of Mental Accounting was first named by Richard Thaler (1980). In this theory people code, categorise and evaluate economic outcomes. Mental accounting theorists argue that people group their assets into a number of non-replaceable mental accounts. One detailed application of mental accounting, the behavioural life cycle hypothesis (Shefrin & 1992), theorizes that people mentally frame assets as belonging to either current income, current wealth or future income and this has implications for their behaviour as the accounts are largely non-interchangeable.

Nobel prize for the Richard Thaler's theory

The 2017 Nobel Prize in Economics was awarded to Richard Thaler from the University of Chicago and works at the intersection cynosure of psychology and economics. One of the things that Thaler has become known for is the concept of the “nudge,” which is a small change to someone’s environment that can have a big influence on their behavior in economic situations. The most famous example of a nudge is forcing people to “opt out” of default options. Research suggests that people typically stick with the default option on a form. That means policy makers can decide which option they want most people to choose and make that one the default.

Another very important concept used to understand mental accounting is that of modified utility function. There are 2 values attached to any transaction - acquisition value and transaction value.

How Mental Accounting is related to Self Control

The idea is by keeping separate mental accounts, it is easier to engage in self-control. When you start to spend too much against one of your mental accounts, it makes it easier to walk away from new purchases. Many of Thaler’s studies focus on these decision processes like these.