The Washington Post has a fascinating article on the psychology of mental accounting – a seemingly simple process but one which seems to have curious effects on how we decide to spend our money.
The article suggests we mentally divide our money for different purposes, and tend to be reluctant to change our thinking, even when it is against our interests.
There’s a nice example of turning up to the cinema and discovering you’ve lost your $20 ticket. How would you feel about shelling out for another one?
Compare this situation to one in which you turn up to the cinema to buy a ticket, but find you’ve lost a $20 bill. How would you feel about buying a cinema ticket in this situation?
Intuitively, it seems as if the first situation is worse, because you’re buying another ticket, when, in fact, the loss is exactly the same in both situations.
It also seems that we assign different sources of money to different purposes, despite the fact that money is completely interchangeable:
Arkes and his colleagues once cited an anecdote in a study: Employees of a publishing firm who were in the Bahamas for an annual meeting were each given a cash bonus for getting a big contract. Almost to a person, the bonus recipients took the money to a local casino and blew it. What is interesting is that most of these people did not lose more than the $50 — they slowed down or stopped when they felt they were playing with their “own” money rather than with the $50 of “free” money. The irony, of course, is that the $50 these people lost was their own money, too.
The article has got some more great examples of how we make spending decisions based on our own idosyncratic internal accounting schemes.
UPDATE: An interesting note from jswolf19, grabbed from the comments:
In my mind, the loss of the ticket and the loss of $20 are not the same. It’s possible that I might find either the ticket or the $20 later (that it’s misplaced instead of lost). However, the ticket will have become useless to me whereas the $20 will not have.