The Mind of Money: Mental Accounting Theory Checks Out

When it comes to money, humans are not always rational.

First introduced decades ago, the influential concept of mental accounting posits that consumers make decisions based on subjective accounts that diverge from objective financial values. For example, consumers perceive a $100 check for overtime work differently than a $100 tax refund. One is seen as earned, and the other as a discretionary bonus. A new study of 5,589 participants across 21 countries finds evidence that this concept still holds true.

The new study is the first large-scale test of mental accounting’s replicability and generalizability. Giulia Priolo, PhD; Federica Stablum, PhD; and Enrico Rubaltelli, PhD, all from the University of Padova, Italy, led the study. Kai Ruggeri, PhD, professor of health policy and management at Columbia University Mailman School of Public Health, served as a senior expert. The findings appear in the Journal of Consumer Research. 

The researchers say they were uncertain whether the mental accounting concept would hold up in the current environment, in which technology has completely changed our relationship with money and how we spend it. For example, the norm now is to receive both overtime pay and tax rebates via direct deposit. “Considering major changes in how we receive and spend money, especially with the proliferation of automated digital payments, a large, robust study of the concept of mental accounting was not only appropriate, it was necessary,” says Ruggeri.

In the online survey, participants responded to several scenarios, such as making consumer decisions about identical products and prices but at different stores. Similarly, classic measures tested whether saving the same amount on a given product—for example, $5—had the same result if the total cost was $10 or $100. The survey was completed in local languages with monetary values in scenarios adjusted relative to the country’s gross national product. 

The researchers found that mental accounting effects were weaker in lower-income countries than in higher-income countries. This may be partly because researchers originally studied mental accounting in higher-income countries. However, more critically, it may indicate that individuals with less discretionary income are more sensitive to monetary values, regardless of context. In other words, people with lower incomes or fewer economic opportunities may treat financial amounts similarly, whether they are part of major or small purchases. 

Demographic factors such as age, education, and household income were not associated with mental accounting, indicating that its effects are consistent across diverse consumer groups. The researchers also found that mental accounting effects vary by social context (individual vs. interactive decisions), decision perspective (deciding for self vs. other), and role in price determination (setting vs. evaluating prices).

Mental Accounting and Health Care Spending

Ruggeri offers an example of how mental accounting applies to health care spending related to Flexible Spending Accounts (FSAs). Early in the year, consumers avoid certain health-related choices (like buying glasses or purchasing medicines) even if the money is in the account. Closer to the end of the year, they see the money as already spent (i.e., “use it or lose it”), so we are more likely to make a purchase. Ruggeri says this is a problem. “If we need these glasses or medications in July, buying them in December is not optimal. Additionally, retailers know about this behavior and may charge a premium for FSA-eligible products as annual deadlines approach, meaning we might pay even more. So we see the same $10 early in the year as “savings I shouldn’t touch,” but later in the year as “money I have to use.”

A full list of authors is available in the study.