Mental accounting
Mental accounting is treating money differently depending on where it came from or which mental 'budget' it belongs to, even though every dollar is worth the same. It can help with budgeting, but it also leads to poor overall choices.
In everyday life
Someone carries credit card debt at a high interest rate while keeping savings in a low-interest 'vacation fund' they refuse to touch.
You win 200 dollars in an office raffle and spend it all on one fancy dinner, though you would never spend that much of your paycheck on a single meal.
Why your mind does this
Our brains handle small, concrete quantities well but struggle with large numbers, fractions and odds. Rounding, grouping and labeling let us make fast decisions without doing the math. For most daily choices, a rough answer is good enough.
Its family, in 30 seconds: Simpler numbers
How to spot it
Ask whether you would make the same choice if this money had come from your regular paycheck.
How to counter it
Look at your total finances as one pool when deciding on large purchases or debt payments.
Same family: Simpler numbers
SourcesThaler (1985)·Wikipedia