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Mental Accounting: A Critic Into Your Preferences

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Sometimes we fail to acknowledge the fungibility of money and this is often caused by the fact that sometimes we often place money made to take care of a specific need more important than another piece of money set aside for another need.

Take for example, someone might have an amount of money, while this amount of money can specifically pay for their rent, or give then an elaborate Christmas experience, there are people who would absolutely go for the choice of using this money to have an eventful Christmas, placing a much bigger value to the money for Christmas expenditures because paying rent might seem less exciting and of course, the opportunity cost of losing that Christmas experience is something they might never forgive themselves for.

This is what is called Mental accounting. Mental accounting is placing value over the Importance of one expenditure to another, thereby failing to see the universal sameness to money due to emotional or psychological reasons.


In the world currently, scarcity is a big issue, almost everyone reliant on a stream of Income has compounding needs to solve with static salary and the Influence of inflation on a currency. This is why mental accounting is a thing. When it comes to saving for example, a lot of people who are saving for a particular prospect would never touch their savings no matter the real life they're facing that only money can solve.

I've known people who have a lot of money locked away in current accounts, but immediately they have hospital emergencies they'll never touch their savings to actually treat or take care of their medical bills for them to stay alive.

This is mostly because the money in their bank may go for opening a new business, buying a new car or building a new house. In a state of mental accounting, these purpose for this money might overwhelm the need to pay for a medical bill even if in a rational senses, they need to stay alive at the moment for the future to be a possibility.


The diverse ways which we place importance to money is mental accounting, it is placing value to money diversely in respite to the different expenses that they're expected to take care of.

For example while we might place more value to the money we worked hard for, we might not do the same for another person's money in the same way we have done to ours. For example, let's say a person got a $100 bill as their wages, and they're gifted that same amount of money by their boss for actually being diligent, the way they'll spend the money they were gifted by their boss and the one they actually worked for would be totally different

This is because according to mental accounting, one was worked for, and the other was freely gotten, the one that's freely gotten might be spent without plans and this is how often make choices.


It's often difficult to understand the fungibility of money and this is because sometimes we go ahead to consider some emotional factors when spending. However, does this totally mean mental accounting is all shades of "bad"? The answer would be no.

It is subconsciously creating a scale of importance to one's need and allocating resources to them, while it can be devastating in investing, it's quite milder when it comes to investing. You know how you already spend your salary in your mind towards the ending of the month even before receiving the money into your account? That is also an aspect of mental accounting. Originally we need to plan.

Money is the means, but our choices gives it essence. For example, while it's possible for us to say mental accounting makes us make emotional decisions, for what it's worth, applying logic when apportioning importance to what matters more or less makes us lose the grander scheme to our money lesson.


This is to say that we learn and become dynamic by actually experiencing the beauty that comes with being rational, this is why the human emotion is not all that putrid when it comes to allocating resources to where we might deem fit.

Mental accounting reminds us of our human we are, inasmuch as it's utterly imperfect not to see the fungibility of money, in some milder scenarios are attained financial consciousness by actually having or creating a crisp sense of mental accounting. Having a scale of preference is setting a form of mental accounting. Sometimes what is on top of our scale of preference might not be the Most important, but what would actually appeal to us in a special and bizarre kind of way.

Mental accounting might be more detrimental in investing, but it's definitely not the same when it comes to investing. In critical thinking, the human factor is needed, irrespective of how imperfect we deem it to be.




Interested in some more of my works?


A Personal View Into The Meaning Of Spirituality (ecoTrain QOTW)
Why You Couldn't Create Good Contents In 2021, Why You Still Wouldn't In 2022.
A Psychoanalytic Dive Into Incentivized Loyalty
The Nigerian/African Disposition On Marriage As An Endowment
Living & Living Unintentionally (The Financial Repercussion)

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@Josediccus, your brother-in-pen & heart


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