Provided by IMC! Peer Mentor: Carlos Teran
As Halloween approaches I wanted to write about something truly spooky, horrifying, and worst of all far too common; the monster that is Mental Accounting. Mental Accounting is the process in which people place different values on the same expenditures based on subjective criteria or context. For example, albeit cliché, let’s say a coffee shop offers John a cup of regular coffee for $10. John scoffs at such a ridiculous and outlandish price. Now let’s say John is vacationing at an opulent seaside villa in the Mediterranean and at the café down the street they offer him the same cup of coffee for the same $10. Is he going to miss out on the opportunity to sip on his morning coffee with that view? John gladly hands over the money because of the context. He’s on vacation, why shouldn’t he treat himself, right? Regardless, John just spent $10 in exchange for the same good he previously scoffed at because of a perceived shift in context.
While one example of a single cup of coffee may not seem detrimental, lets expand on this example. Extrapolate this same logic on the decision to buy new shoes, a new phone, car, or house. Perhaps an even more relevant and relatable example is checking your credit card statement after Oktoberfest. Over a person’s lifetime Mental Accounting can cost hundreds of thousands of dollars. To make matters worse, marketers and advertisers’ entire job is to shift the context around your buying decision and ensure that you think you’re getting a good deal. This is especially important with the holidays approaching. We wouldn’t normally spend this much, but it’s Christmas and what are we to do?
The best way to combat mental accounting is to create and stick to a stringent budget. Setting a cap on monthly expenditures, or budgeting for an expensive purchase rather than making it on a whim will save thousands of dollars over time. And while admittedly this solution may be simple, it doesn’t mean it’s easy. It is a difficult habit to build and maintain when everyone is trying to get your dollar.
Have a happy Halloween and beware of the monster that is Mental Accounting!
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