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Mental Accounting Alarm clocks and Christmas clubs are external devices people use to solve their self-control problems. Another way to approach these problems is to adopt internal control systems, otherwise known as mental accounting. Mental accounting is the system (sometimes implicit) that households use to evaluate, regulate, and process their home budget. Almost all of us use mental accounts, even if we’re not aware that we’re doing so. The concept is beautifully illustrated by an exchange between the actors Gene Hackman and Dustin Hoffman in one of those extra features offered on DVDs. Hackman and Hoffman were friends back in their starving artist days, and Hackman tells the story of visiting Hoffman’s apartment and having his host ask him for a loan. Hackman agreed to the loan, but then they went into Hoffman’s kitchen, where several mason jars were lined up on the counter, each containing money. One jar was labeled “rent,” another “utilities,” and so forth. Hackman asked why, if Hoffman had so much money in jars, he could possibly need a loan, whereupon Hoffman pointed to the food jar, which was empty. According to economic theory (and simple logic), money is “fungible,” meaning that it doesn’t come with labels. Twenty dollars in the rent jar can buy just as much food as the same amount in the food jar. But households adopt mental accounting schemes that violate fungibility for the same reasons that organizations do: to control spending. Most organizations have budgets for various activities, and anyone who has ever worked in such an organization has experienced the frustration of not being able to make an important purchase because the relevant account is already depleted. The fact that there is unspent money in another account is considered no more relevant than the money sitting in the rent jar on Dustin Hoffman’s kitchen counter.
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Richard H. Thaler (Nudge: Improving Decisions About Health, Wealth, and Happiness)