Mental accounting is a form of book keeping that everyone does more or less automatically, although not necessarily consciously. Studies have shown that we divide our finances between separate mental accounts, such as going out, household expenses, clothes, buying birthday presents etc., and then keep a metal tally of how much we have left to spend.
For instance, it’s a common January phenomenon that people stop going out in order to ‘pay off Christmas, that’s when the brain starts working out a new budget to try and make up for the previous month’s bingeing.
For many people, self-control allows them to stay within their mental budget; for example, they might go for a couple of expensive nights out straight after payday, but then they spend the last week of the month staying in to compensate.
The problem with mental accounting is that it is so difficult to do accurately that we often cheat, allowing for a little creative book keeping or convincing ourselves that we are buying less than we are.
Mark Twain supplied a perfect example of this in 1897: having limited himself to one cigar a day, he started shopping for bigger and bigger cigars until he found one of such proportions that he could have used it as a crutch.
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