Mental accounting matters

Mental accounting is the set of cognitive operations used by individuals an d households to organize, evaluate, and keep track of financial activities. Making use of research on this topic over the past decade, this paper summ arizes the current state of our knowledge about how people engage in mental accounting activities. Three components of mental accounting receive the m ost attention. This first captures how outcomes are perceived and experienc ed, and how decisions are made and subsequently evaluated. The accounting s ystem provides the inputs to be both ex ante and ex post cost-benefit analy ses. A second component of mental accounting involves the assignment of act ivities to specific accounts. Both the sources and uses of funds are labele d in real as well as in mental accounting systems. Expenditures are grouped into categories (housing, food, etc.) and spending is sometimes constraine d by implicit or explicit budgets. The third component of mental accounting concerns the frequency with which accounts are evaluated and 'choice brack eting'. Accounts can be balanced daily, weekly, yearly, and so on, and can be defined narrowly or broadly. Each of the components of mental accounting violates the economic principle of fungibility. As a result, mental accoun ting influences choice, that is, it matters. Copyright (C) 1999 John Wiley & Sons, Ltd.