Tag: Mental Accounting

The thinking man's ape

Savings Aren’t Savings Unless They’re Actually Saved

During a jog this week, something  happened that many joggers have experienced before.  I found money on the ground.  A small windfall like this sparked an interesting response, which was to put it in my wallet.  Where else does this money belong after all?  Certainly not on the jogging track at my local park.  So why was saving this money an unusual response?  Because according to behavioral economics, individuals are more likely to spend money they find on the ground on something frivolous².  According to “mental accounting,” a concept coined by nobel prize-winning economist Richard Thaler, people treat money differently depending on extraneous factors like it’s origin and it’s intended use.  The theory hinges upon the determinant that money has fungibility  – that is, it has properties like being interchangeable, and doesn’t have labels.²  For example, $200 found on the ground is considered “free money” that can be spent without reservation (e.g., on a nice restaurant dinner).  Even though it’s worth the same $200 that we earn from working our day jobs (or night jobs).
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