Has “mental accounting” ever influenced your financial decisions?

Scenario 1: Suppose your favourite singer is holding a concert, and you bought a $1,000 ticket. At the entrance, you realize the ticket is missing. Would you go to the ticket office and buy a new one?
Scenario 2: You are going to a concert by your favourite singer, but in this scenario, tickets are available only at the on-site ticket office. At the ticket window, you realize you have lost a $1,000 banknote. Would you buy a ticket to the show anyway?

“Mental accounting” influences financial decisions

“Mental accounting” influences financial decisions
This test is related to a theory put forward by a Nobel Laureate in Economics. According to the theory, human brains set up different “accounts” for money from different sources or for different purposes. Even if the actual monetary value is the same, money from different “accounts” can have different personal value because of our psychological biases, thus affecting our financial decisions. Your monthly income, for example, is hard earned, so you spend it carefully. But when it comes to your year-end bonus, you may tend to spend it more easily, viewing it as a reward for your hard work. (You might even spend more from your bonus than you saved from your monthly salary all year.) The same is true for cash coupons won from a lucky draw, or money won from small bets; we tend to spend it more recklessly. These are all behaviours influenced by “mental accounting”. If we take a closer look, we will find that a dollar in hand, no matter where it comes from, is just a dollar that belongs to you, and you should treat each dollar the same.
Don't ignore your MPF

Don't ignore your MPF
From now on, try to be aware of “mental accounting” and not let it interfere with your financial decisions. Take extra note of your assets, including your MPF and any other savings and retirement investments. Make it a habit to read your MPF Annual Benefit Statement carefully, so you have a good grasp of your contributions and the performance of your investments over the past year. Regularly review it and consider whether you need to adjust your MPF investments, based on any changes to your personal circumstances. Don’t let psychological biases stall your retirement plans.Kenny Mak – Chartered Financial Analyst
Click here to series of “Overcoming blind spots for a happy retirement”
Click here to series of “Overcoming blind spots for a happy retirement”