The Nobel Prize for Mental Accounting

The Nobel Prize for Mental Accounting

A Vietnamese vendor counts her hard-earned money aboard a local ferry

Photo by Niels Steeman on Unsplash

Money's role as a medium of exchange relies on the idea that the dollar you walk into a gas station with to buy fuel, has the same value as the dollar that you take into a grocery store to buy food.

But that's not how we think. Instead we divide our money into "buckets" of different perceived value. 

This year's Nobel Prize in Economics was awarded to Richard Thaler, who has researched how we create different "mental accounts" from which we invest, indulge, donate and buy groceries.

For example, if the price of gas goes up, people cut back on driving to save money, at significant inconvenience. Even though it would be much easier to take money from the groceries "bucket" and simply cut out a few treats to balance the budget.

Thaler's work shows us that we humans are irrational when it comes to money.

As accountants we can only tell you what the numbers are. We can't tell you how to think and feel about them.