Analysis of the Definition and State-of-Art Investigations for Mental

Accounting

Yifei Niu

Zhengzhou XinFengYang Foreign Language Middle School, Zhengzghou, China

Keywords: Mental Accounting, Behavioural Economics, Consumer Decision-Making, Non-Fungibility, Budget Control.

Abstract: Mental accounting theory is an important concept in behavioural economics, formally proposed by Richard

Thaler in 1985. This theory reveals the psychological process of classifying, encoding, and evaluating

financial outcomes in economic decision-making, explaining why individuals often deviate from the "rational

person" assumption in behaviours, e.g., consumption and investment. Based on the analysis, this paper

systematically summarizes the concept, classification, related theories, and applications of mental accounting

in areas such as consumer behaviour and wealth management, while also exploring future research directions.

To be specific, mental accounting is widely used in economic decision-making, and it is really important

factor which force the final decision. The two decision tendencies reflect the difference in risk attitude when

people face different mental accounts。Risk-oriented decision making: People tend to take higher risks in

pursuit of potentially higher returns, usually in "profit accounts," e.g., when investing or gambling.

Conservative decision making: People are more risk-averse and tend to choose safe, low-risk options, usually

in "loss accounts" or "protection accounts," such as savings or insurance.

1 INTRODUCTION

Mental accounting, a cornerstone concept in

behavioural economics, refers to the cognitive

process through which individuals categorize,

evaluate, and manage their financial resources in

distinct mental "accounts" based on subjective

criteria such as source, purpose, or emotional

significance (Thaler, 1985). This phenomenon

challenges traditional economic theories, which

assume that money is fungible and that individuals

make rational, utility-maximizing decisions. Instead,

mental accounting reveals that people often treat

money differently depending on its origin or intended

use, leading to behaviours that may appear irrational

or inconsistent (Thaler, 2017).

The implications of mental accounting extend

across various domains, including consumer

behaviour, investment decisions, and financial

planning. For instance, individuals tend to segregate

funds into categories such as "savings,"

"entertainment," or "emergency expenses," each

governed by unique rules and emotional associations

(Xu & Ma, 2023). This compartmentalization can

lead to suboptimal financial decisions, such as

overspending on discretionary items while neglecting

essential savings or investments (Thaler, 2017).

Moreover, mental accounting influences how people

perceive gains and losses, often prioritizing short-

term emotional satisfaction over long-term financial

well-being (Kahneman & Tversky, 1979; Prelec &

Loewenstein, 1998).

In the context of consumer behaviour, mental

accounting plays a pivotal role in shaping purchasing

decisions. Studies have shown that individuals are

more likely to spend "windfall" money, such as

bonuses or lottery winnings, on luxury items or non-

essential goods, whereas they are more cautious with

income derived from regular employment (Thaler,

1985; Hirst et al., 1994; Bonner et al., 2014). This

behaviour is driven by the emotional labelling of

funds, where unexpected gains are mentally

categorized as "extra" and thus more expendable (Xu

& Ma, 2023). Similarly, mental accounting affects

how consumers respond to pricing strategies,

discounts, and payment methods, often leading to

irrational choices that deviate from traditional

economic predictions (Thaler, 2017).

In the realm of investment, mental accounting can

significantly impact risk tolerance and portfolio

management. Investors often allocate funds to

different mental accounts based on perceived risk

786

Niu, Y.

Analysis of the Deﬁnition and State-of-Art Investigations for Mental Accounting.

DOI: 10.5220/0013861300004719

Paper published under CC license (CC BY-NC-ND 4.0)

In Proceedings of the 2nd International Conference on E-commerce and Modern Logistics (ICEML 2025), pages 786-790

ISBN: 978-989-758-775-7

levels, such as "safe" investments for retirement

savings and "risky" investments for speculative gains

(Thaler, 2017). This compartmentalization can result

in an inefficient allocation of resources, as individuals

fail to consider their overall financial portfolio

holistically (Shefrin & Statman, 1985). Furthermore,

mental accounting can exacerbate behavioural biases,

such as loss aversion and the disposition effect, where

investors hold onto losing investments for too long

and sell winning investments too quickly (Odean,

1998).

Despite its widespread influence, mental

accounting remains an underexplored area in

behavioural finance and consumer psychology.

Recent research has begun to uncover the nuanced

ways in which cognitive and emotional labels shape

financial decision-making, particularly among

younger demographics and in the context of digital

payment systems (Xu & Ma, 2023; Silva et al., 2023;

Xia & Madni, 2024). However, there is a pressing

need for further investigation into how mental

accounting interacts with cultural, social, and

technological factors to influence economic

behaviour.

This paper aims to provide a comprehensive

review of the existing literature on mental accounting,

synthesizing insights from psychology, behavioural

economics, and consumer research. By examining the

theoretical foundations, empirical evidence, and

practical implications of mental accounting, this

study seeks to enhance the understanding of how

individuals manage their financial resources and

make decisions in complex, real-world contexts.

Ultimately, this research contributes to the broader

discourse on behavioural finance and offers

actionable insights for policymakers, financial

advisors, and consumers seeking to mitigate the

adverse effects of mental accounting on financial

well-being.

Recent research on mental accounting highlights

its role in shaping financial decisions and consumer

behaviour. Studies emphasize the non-fungibility of

funds, where individuals treat money differently

based on its source or purpose, leading to irrational

spending patterns. Advances in digital payment

systems have further influenced mental accounting,

with users categorizing expenses more precisely but

also facing risks of overspending. Additionally,

research explores how mental accounting affects

investment strategies, often resulting in inefficient

portfolio management due to compartmentalized risk

perceptions. Future studies aim to integrate cultural

and technological factors to better understand its

long-term impacts.

In order to learn well the inherit connections, this

paper aims to summarize the theoretical development,

classification, and practical applications of mental

accounting, as well as discuss future research

directions. The rest part of the paper is organized as

follows. The Sec. 2 will set forth the definition and

the classification of mental accounting. The Sec.3

will give some theories that are closely related to the

mental accounting. The Sec.4 will give some

examples about the application of mental accounting.

Last but not least, the Sec.5 will show the limitation

of the research and the future development direction.

2 CONCEPT AND

CLASSIFICATION OF MENTAL

ACCOUNTING

2.1 Definition of Mental Accounting

Mental accounting refers to the psychological process

of classifying, encoding, and evaluating economic

outcomes. Thaler posits that individuals categorize

funds from different sources into distinct "accounts"

and manage them differently based on the nature of

these accounts. For example, salary income is often

viewed as a "hard-earned" account, while lottery

winnings are categorized as "windfall gains."

2.2 Classification of Mental Accounting

Mental accounting is primarily classified based on the

source of wealth and expenditure items. By source of

wealth, it can be divided into salary income accounts,

investment income accounts, business income

accounts, and windfall income accounts. By

expenditure items, it can be categorized into basic

living expense accounts, entertainment expense

accounts, emotional expense accounts, and

communication expense accounts.

Money is often categorized based on its origin,

such as "earned income" versus "windfall gains." For

instance, individuals are more likely to spend

windfall money, such as lottery winnings or bonuses,

on luxury items, while treating earned income more

cautiously. This behavior reflects the emotional

labeling of funds, where unexpected gains are

perceived as "extra" and thus more expendable. A

classic example is the "windfall effect," where people

tend to spend unexpected money more freely than

regular income. Similarly, research shows that

individuals are less likely to save windfall gains

Analysis of the Deﬁnition and State-of-Art Investigations for Mental Accounting

787

compared to earned income, highlighting the non-

fungibility of mental accounts.

Mental accounts are also organized by their

intended use, such as "savings," "entertainment," or

"retirement funds." This classification helps

individuals manage their finances by assigning

specific budgets to each category. However, it can

lead to suboptimal decisions, such as overspending on

entertainment while neglecting long-term savings.

For example, people may allocate a fixed amount to a

"vacation fund" and spend it entirely on leisure, even

if they have pressing financial obligations. This

compartmentalization often results in inefficient

resource allocation, as individuals fail to consider

their overall financial portfolio holistically.

Emotional significance plays a crucial role in

mental accounting. Money allocated to "charitable

donations" or "gifts" is often treated with greater

emotional weight than funds for routine expenses.

This classification can influence spending patterns, as

individuals may prioritize emotionally satisfying

expenditures over financially prudent ones. For

instance, people are more likely to spend money on

gifts for loved ones during holidays, even if it means

exceeding their budget. This emotional attachment to

certain accounts can lead to irrational financial

behaviors, such as overspending on emotionally

charged items while neglecting essential expenses.

3 RELATED THEORIES OF

MENTAL ACCOUNTING

3.1 Non-Fungibility Theory

The non-fungibility theory suggests that funds in

different mental accounts are not interchangeable. For

instance, salary income and windfall income are

treated differently, with the former being more valued.

3.2 Budget Control Theory

The budget control theory posits that individuals set

budgets for different mental accounts to regulate

spending behavior. However, in some cases, budget

control may instead promote hedonic consumption.

3.3 Flexible Mental Accounting Theory

The flexible mental accounting theory challenges the

absoluteness of non-fungibility and budget control,

arguing that certain expenditures are flexible and can

be allocated to multiple accounts, thereby weakening

the effects of budget control.

4 APPLICATIONS

4.1 Applications of Mental Accounting

in Consumer Behaviour

Mental accounting influences consumers' purchasing

decisions. For example, consumers tend to use

"windfall gains" for hedonic consumption, while

allocating salary income to essential purchases.

Mental accounting, a concept rooted in behavioral

economics, has gained significant attention in

consumer behavior research, particularly in the

context of digitalization and evolving consumption

patterns. Recent studies (post-2020) have explored

how mental accounting influences consumer

decision-making, especially in areas such as online

shopping, payment methods, and impulsive

purchases. For instance, research highlights that

consumers tend to categorize unexpected income

(e.g., bonuses or discounts) into "windfall accounts,"

leading to increased spending on non-essential items.

This behavior underscores the non-fungibility of

mental accounts, where money is treated differently

based on its source or intended use.

Another key area of focus is the role of mental

accounting in payment preferences. Studies reveal

that consumers are more likely to opt for installment

payments or credit options when purchases are

framed as part of a "future expense account,"

reducing the perceived immediate financial burden.

Additionally, the rise of digital payment platforms

has further complicated mental accounting, as

consumers often struggle to track expenses in real-

time, leading to overspending and budget

mismanagement.

In the context of the spending of university

students, mental accounting has been used to analyze

irrational spending behaviors, such as excessive

borrowing or luxury consumption. For

example,students in university often allocate funds to

"emotional accounts" for social activities or gifts,

prioritizing short-term satisfaction over long-term

financial stability.

Overall, these studies demonstrate the profound

impact of mental accounting on consumer behavior,

offering valuable insights for marketers and

policymakers aiming to design effective strategies

and interventions. Future research could further

explore the interplay between mental accounting,

cultural factors, and emerging technologies to

ICEML 2025 - International Conference on E-commerce and Modern Logistics

788

enhance its practical applications. Mental accounting

plays a significant role in overconsumption. Hedonic

mental accounts are more likely to lead to

overconsumption, whereas practical and conservative

mental accounts tend to curb such behavior.

4.2 Applications of Mental Accounting

in Investment Decisions

Individual investors in China exhibit distinct mental

accounting characteristics in their investment

decisions. For instance, investors may categorize

conservative investments (e.g., bonds) and high-risk

investments (e.g., stocks) into separate mental

accounts, influencing their risk preferences and

investment strategies.

The existence of mental accounting may lead to

biases in investment decisions. For example, losses in

one account may affect decisions in other accounts,

even if such decisions are objectively irrational.

Mental accounting, a concept rooted in behavioral

economics, has been increasingly applied to

understand investment decisions, particularly in the

context of individual investors. Recent studies (post-

2020) highlight how mental accounting influences

risk preferences, asset allocation, and decision-

making biases in investment scenarios.

One key finding is that investors often categorize

their funds into distinct mental accounts, such as "safe

investments" (e.g., bonds or savings) and "risky

investments" (e.g., stocks or cryptocurrencies). This

compartmentalization can lead to suboptimal

portfolio management, as investors may over-allocate

to high-risk assets in one account while being overly

conservative in another, ignoring the overall risk-

return balance.

Another significant area of research focuses on

the impact of mental accounting on loss aversion and

the disposition effect. Investors tend to hold onto

losing investments for too long, hoping to recover

losses, while selling winning investments

prematurely to lock in gains. This behavior is

exacerbated by mental accounting, where losses and

gains are evaluated within isolated accounts rather

than the broader portfolio context.

Additionally, studies have explored how mental

accounting interacts with digital investment

platforms. The ease of tracking and categorizing

investments online has both positive and negative

effects. While it enhances transparency, it can also

reinforce compartmentalized thinking, leading to

irrational decisions such as over-trading or neglecting

diversification.

In summary, mental accounting plays a critical

role in shaping investment decisions, often leading to

biases and inefficiencies. Future research could

further investigate how cultural factors and

technological advancements influence mental

accounting in investment contexts, providing deeper

insights for both investors and financial advisors.

5 LIMITATIONS FUTURE

DIRECTIONS IN MENTAL

ACCOUNTING RESEARCH

Future research could further explore the application

of mental accounting in emerging fields such as the

digital economy and virtual currencies, as well as

cross-cultural differences in mental accounting.

Mental accounting theory has broad application

prospects in consumer behavior analysis, wealth

management, and policy formulation. Future

empirical studies could further validate its

effectiveness in different scenarios.

Mental accounting, a cornerstone of behavioral

economics, has significantly advanced the

understanding of how individuals categorize,

evaluate, and manage financial resources. However,

despite its extensive applications in consumer

behavior, investment decisions, and financial

planning, the field faces several limitations that

hinder its broader applicability and theoretical

development. One major limitation is the

predominance of research conducted in Western,

educated, industrialized, rich, and democratic

(WEIRD) societies, which limits the generalizability

of findings to diverse cultural and socioeconomic

contexts. Additionally, current research primarily

focuses on individual decision-making, neglecting

the role of group or collective mental accounting,

such as in household budgeting or organizational

financial planning. The rapid evolution of digital

payment systems and cryptocurrencies has also not

been fully integrated into mental accounting studies,

leaving a gap in understanding how technological

advancements influence financial categorization and

decision-making. Furthermore, most studies

concentrate on short-term behaviors, such as impulse

purchases, while the long-term effects of mental

accounting, such as its impact on retirement planning

and wealth accumulation, remain underexplored.

Theoretical fragmentation is another issue, as mental

accounting research is often siloed within psychology,

behavioral economics, and consumer behavior,

lacking a unified framework to comprehensively

Analysis of the Deﬁnition and State-of-Art Investigations for Mental Accounting

789

explain its cognitive and emotional mechanisms.

Finally, the ethical implications of leveraging mental

accounting biases in marketing and policy design

require further scrutiny, as current research does not

provide sufficient guidelines to ensure these

applications benefit society without exploiting

consumers. Addressing these limitations through

more diverse, interdisciplinary, and long-term studies

could significantly enhance the theoretical and

practical relevance of mental accounting.

6 CONCLUSIONS

To sum up, the mental accounting is influencing a lot

in the economic decisions. Mental accounting theory

provides a crucial perspective for understanding

irrational behaviours in economic activities. By

summarizing its concept, classification, and related

theories, this paper highlights the applications of

mental accounting in consumer behaviour and

investment decisions, as well as future research

directions, offering valuable insights for both theory

and practice in related fields. Overall, these results

pave a path to summarize the knowledge about the

mental accounting.

REFERENCES

Bonner, S. E., Clor-Proell, S. M., Koonce, L., 2014. Mental

accounting and disaggregation based on the sign and

relative magnitude of income statement items. The

Accounting Review, 89(6), 2087-2114.

Hirst, D. E., Joyce, E. J., Schadewald, M. S., 1994. Mental

accounting and outcome contiguity in consumer-

borrowing decisions. Organizational Behavior and

Human Decision Processes, 58(1), 136-152.

Kahneman, D., Tversky, A., 1979. Prospect theory: An

analysis of decision under risk. Econometrica, 47(2),

263-291.

Odean, T., 1998. Are investors reluctant to realize their

losses? The Journal of Finance, 53(5), 1775-1798.

Prelec, D., Loewenstein, G., 1998. The red and the black:

Mental accounting of savings and debt. Marketing

science, 17(1), 4-28.

Shefrin, H., Statman, M., 1985. The disposition to sell

winners too early and ride losers too long: Theory and

evidence. The Journal of Finance, 40(3), 777-790.

Silva, E. M., de Lacerda Moreira, R., Bortolon, P. M., 2023.

Mental Accounting and decision making: a systematic

literature review. Journal of Behavioral and

Experimental Economics, 107, 102092.

Thaler, R., 1985. Mental accounting and consumer choice.

Marketing Science, 4(3), 199-214.

Thaler, R., 2017. Misbehaving: The making of behavioral

economics. W.W. Norton & Company.

Xia, Y., Madni, G. R., 2024. Unleashing the behavioral

factors affecting the decision making of Chinese

investors in stock markets. Plos one, 19(2), e0298797.

Xu, L., Ma, J., 2023. The impact of mental accounting on

consumer behavior. Journal of Behavioral Finance,

24(3), 215-228.

ICEML 2025 - International Conference on E-commerce and Modern Logistics

790