Mental Accounting

The economist Richard Thaler coined the concept of mental accounting. According to Thaler:

• People think of value in relative rather than absolute terms. They derive pleasure not just from an object’s value, but also the quality of the deal.
• People fail to fully consider opportunity costs and are susceptible to the sunk cost fallacy.
• People treat money differently, depending on the money’s origin and intended use, rather than thinking of it in terms of the “bottom line” as in formal accounting.
• People don’t like to spend money. We experience the pain of paying because we are loss averse.