By Echo Huang, CFA, CFP®, CPA
Imagine that you decide to go to see a new movie. You hand the cashier at the counter a twenty dollar bill. She gives you back a ten dollar bill and a ten dollar ticket. But when you get to the theater door, you realize you don't know where your ticket is. It's just lost. Do you think you'd pay ten dollars for a new ticket, or would you just head home? If you're like most people, you might be tempted to head home. In fact, when the psychologists Kahneman and Tversky presented this problem to college students, fifty-four percent of people said they'd probably just head back home.
But now imagine a different scenario. This time, you hand the cashier at the counter twenty dollars. This time, she gives you back two ten dollar bills, so that you can easily pay ten dollars at the door to get in. But when you get to the door, you realize that you can only find one of the ten dollar bills. The other one's not in your purse or your pocket. It's just lost. Would you pay ten dollars for the movie or just head home? if you're like most people, you'd probably still go see the movie. In fact, when Kahneman and Tversky presented this problem to college students, eighty-eight percent of people said they'd probably go to the movie anyway.
The different responses to these cases illustrate a bias known as "mental accounting." Mental accounting bias is an information-processing bias in which people treat one sum of money differently from another equal-sized sum based on which mental account the money is assigned to. Mental accounts are based on such arbitrary classifications as the source of the money (salary, bonus, inheritance, gambling or business profit) or the planned use of the money (leisure, necessities).