Mental Accounting Explained by Independent Advisors

Developed by economist Richard H. Thaler, mental accounting is a concept in the field of behavioral economics first introduced in Thaler's 1999 paper "Mental Accounting Matters," which appeared in the Journal of Behavioral Decision Making.

The philosophy of mental accounting asserts that individuals place different values on the same amount of money based on subjective criteria as they organize, evaluate, and keep track of financial activities. Because this way of thinking can lead to irrational decision-making in our behavior and money management, this concept is something we often discuss with Allegiant clients in initial meetings. We listen closely and ask meaningful questions to learn about your individual philosophies regarding wealth, spending habits, and goals.

We've asked several members of the Allegiant team, financial planners and investment managers who are experts in this area of behavioral economics, to share their personal perspectives about mental accounting and how it applies to our customized wealth management solutions.

Balancing multiple short and long-term financial goals can be overwhelming, especially when it's not something that you're particularly interested in. There always seems to be something more "important" (or perhaps more pressing items) requiring your time and energy. However, besides health, there is nothing more important than securing your family's financial future. The concept of creating a "bucketed approach," or said another way, using mental accounting, to organize your financial resources may help you understand how you are tracking towards various goals and empower you to make decisions now that you won't second-guess or regret down the road.

Michelle Cross, CFP®, CPA, CDFA®, AIF®
Wealth Advisor
Click here to read Michelle's article: Using Mental Accounting to Organize Your Financial Resources

As serious observers of the economy, we are often reminded that money is fungible and should be compounded by investing appropriately. However, the presence of well-documented biases, such as considering sunk costs and participating in so-called "mental accounting," demonstrates that many people view money in different ways depending how and why it was earned, spent, or saved.

Melissa Walsh, CFA, CFP®
Principal, Senior Wealth Advisor
Click here to read Melissa's article: Mental Accounting and the "Bucket Approach"

Mental accounting plays a huge part in how we advise our clients. What $1,000,000 means to one client could very well be what $10,000,000 means to another. Circumstances are always different. These different priorities and philosophies determine how we tailor our personalized advice to make sure that we are speaking the same language as our client. We spend a great deal of time in the beginning of our relationships to figure out what money means to clients and how they view it. It's one of the key areas that we must understand that helps lead to a healthy, beneficial relationship. 

Carl A. Watkins, CFP®, CDFA, AIF®
Principal, Director of Financial Planning

Sticking with a long-term plan can be challenging at times. We are reminded daily that prices of investments can go up and down, sometimes severely. While we know investors benefit from the length of time they are invested, sometimes it is hard to align short-term and long-term goals in the context of a total portfolio. Mental accounting allows us to make better sense of our multiple needs and goals. Having clearly defined buckets of money to fund specific goals helps us accept market volatility without reacting emotionally. It helps us win the battle against ourselves. 

Benjamin W. Jones, CFP®, AIF®
Principal, President, Chief Investment Officer

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