Psychological Accounting

Psychological accounting refers to the way people mentally categorize and evaluate their money and financial decisions. Much like how we organize files or projects, individuals assign different "categories" to funds—such as savings, expenses, or entertainment—affecting how they perceive spending and saving. For example, someone might be more willing to splurge with a bonus because they see it as separate from their regular income, or resist spending from a “saving” account. This mental accounting influences financial choices, often causing people to behave differently than traditional economic theories would predict, based on how they mentally label and perceive their money.