Mental Accounting Is Irrational
Or 5 Things I Learned From ‘Dollars and Sense, How we Misthink Money and How to Spend Smarter’ by Dan Ariely and Jeff Kreisler 1. Mental Accounting Is Irrational – When we mentally categorize money into separate pots, we also separate that money from being actual money. It becomes the same as having a stack of poker chips to one casino, we feel justified in either 1) spending all that money on anything we can rationalize to fit into that category, or 2) we move it into another category when we over draw from one pot. This can lead us to mislabeling unaccounted-for-money, such as game winnings or money found on the street, as “fun money” and blow it all without thinking twice, when in fact it is still money , and we can use it for all the things we need money for on a regular basis (bills, debt, investing). Instead of relying on our internal accountant, we should lay out a physical or digital budget where we can see where our money is going and stick to it. This will help us whe