American Journal of Humanities and Social Sciences Research (AJHSSR)
2022
American Journal of Humanities and Social Sciences Research (AJHSSR)
e-ISSN: 2378-703X Volume-6, Issue-5, pp-171-176 www.ajhssr.com
Research Paper
Open Access
About Mental Accounting Dr. Sezen Güngör Tekirdag Namik Kemal University ABSTRACT : Why are people willing to spend more than cash when they pay with a credit card? Why are they saving up for retirement but also in the same time why are they accumulating credit card debt? If someone else is paying your credit card debt, you have a perfectly reasonable justification. But there is also someone whom are not so lucky. Why do we ignore the fact of a payment that will be out of our pocket on the statement payment date? How does the journal in our brain work? Where can the money come from and where can the money go?The purpose of this article, which tries to answer all these questions in terms of mental accounting, is to examine in depth the mental accounting, which is one of the behavioral patterns of the investor in behavioral finance. I. What is mental accounting and why is it important? Accounting generally occurs in the forms of recording, classifying, summarizing, reporting and analyzing financial transactions of businesses. It is acceptable for people to need accounting for their own expenses and earnings. However, if this situation only takes place in the mind and turns into invisible journal entries, it will be necessary to mention the mental accounting tendency at this point. The concept of mental accounting was initially used by Richard Thaler (1985). Thaler defined mental accounting as individuals' organizing, evaluating and recording their financial activities, and he argues that people act under the influence of mental accounting and shape their behavior accordingly. Indeed, we often make our consumption decisions around certain categories, such as the “source” or “intention to use” of money. There are many examples such as allocating the salary of a less earning family member only to kitchen expenses, using holiday bonuses only for holiday needs, using a credit card for clothing needs while trying to save money for children's education. It is called "mental accounting" when we spend our money according to different categories that we have created in our minds. In other words, mental accounting, which explains how individuals, investors and households keep records of their financial status and investments, is the mental partitioning of money according to people's needs such as food, rent, electricity, entertainment. Credit cards have been the main subject of many scientific studies since the day they entered our lives. As a matter of fact, the tiny banks we carry in our pockets represents the best examples of mental accounting. Here is the question; Why are people willing to spend more than cash when they pay with a credit card? Why are they saving up for retirement but also in the same time why are they accumulating credit card debt?Seriously why are we acting like this? If someone else is paying your credit card debt, you have a perfectly reasonable justification. But there are also someone whom are not so lucky. Why do we ignore the fact of a payment that will be out of our pocket on the statement payment date? Mental accounting theory answers these questions as follows; Instead of thinking about money in terms of "results" as in formal accounting, people treat it differently depending on factors such as the origin of money and its intended use. According to the concept of "substance priority", which is one of the basic concepts of accounting, essence has priority over form. Let's say you bought a computer. That's the format. The purpose for which you bought the computer is the essence. In other words, if you bought the computer to use it, you save it in fixtures, if you bought it to sell, you save it in commercial goods. Mental accounting, on the other hand, deals with payment besides substance and form. If the payment is made with a credit card, a safe deposit box, or a loan from your mother, your account for it differently. So how does the journal in our brain work? Our brain first groups our expenditures, savings and investments in different mental accounts, then tries to predict the economic results of all transactions, categorizes them with their economic consequences, and finally keeps the record in the evaluation order. In this case, where the money comes from and where it goes becomes important (Thaler, 1999). So where can the money come from?
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