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another kind of eh, close or distance
relative to the pain of paying, is called

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mental accounting.
And here's the idea of mental accounting.

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You know, sometimes companies have
multiple departments, and what they do is,

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they once a year they assign money to the
different departments.

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And the money after it's assigned is
non-fungible, they can't switch it between

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them.
And if one department runs out of money,

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too bad.
If a department has too much money, you

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know, they make a big party where
everybody gets a new laptop.

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But the idea is that once money is
assigned to categories, money is not

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fungible, and the idea of mental
accounting is that we as individual

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consumers also work a little bit like the
accountant, that we assign money to

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different categories and we spend money
according to these categories.

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So here's a beautful example that Dick
Taylor gives.

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And the example is the following.
Eh, you bought a ticket for the theater.

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It cost you a $100.
You get to the theater, you open your

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wallet and to your horror you discover
that you lost the ticket.

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Luckily you have another $100 bill so you
can buy another ticket.

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Would you buy another ticket?
When people are aksed this question most

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of them say no, I'm not going to buy
anohter ticket.

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I lost the ticket, too bad.
I'm not buying another ticket.

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But what if you bought another ticket?
How much would you feel, then, the theater

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cost you?
Most people say $200, the first ticket

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plus the second ticket.
That's case 1.

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Case 2, you haven't bought a ticket yet.
You're going to the theater.

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You're going to buy a ticket.
You open your wallet.

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And to your horror, you discover that you
lost a 100 dollar bill.

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What happens now?
Do you say to yourself, oh, I lost a

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hundred dollar bill, let's not go to the
opera.

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Most people say, how is this related?
I lost a hundred dollar bill, why in God's

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name would I not go to the theater now?
And then, and then they go ahead and they

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spend their hundred dollars and get a
ticket to the theater.

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And then how much do you feel that the
tickets cost you?

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A hundred dollars.
Now think about both of these cases.

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In both of them, you lost a piece of paper
worth a hundred dollars.

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Once it was called a ticket, once it was
called a hundred dollars, but how it was

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called makes you feel very different,
right?

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Now think back about the accounting story,
if you assigned money to the entertainment

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department you gave them $100 and the
entertainment department bought a ticket.

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And then also take it you say too bad to
the entertainment department.

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I'm not replenishing you.
But if you lost money from your general

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wallet, you don't feel any need to for the
entertainment department to pay for it.

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Say, I lost $100, why should the
entertainment department suffer for it.

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Here's a $100, go and buy a ticket.
So there are a couple of things

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interesting here.
One is that as we assign money to

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different categories, this assignment
controls how we feel about the money.

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And the second thing is that money that we
haven't assigned, money that is in our

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general wallet category, feels very, very
differently.

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Another way to think about his is what
happens when you get money back.

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What happen if you get some money back
that is only assigned to one category like

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a gift certificate or off to something
like a return policy.

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And all of sudden because it's assigned to
one category, it's easy for us To spend

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it, we don't, it's assigned to that
category.

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And here's another example for this.
Image that you got paid $5000 dollars to

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do a workshop somewhere.
And you did it in one of two ways.

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The money was either deposited in your
checking account six months ago and now

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you show up in Japan and you have this
Workshop to give.

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In the second case, they give you the
money cash in Japanese yen as you get to

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the hotel in Japan.
Now Japan is expensive.

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Everything is expensive, travel, food,
drinks, entertainment, and so on.

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In which of those cases would you have an
easier time to spend the money.

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In the first case, which was in your
checking account, it's already a part of

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your checking account it's a part of your
wealth and now you would feel bad about

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spending it.
In the second case where you have all this

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amount of money and it's connected to your
trip it's easier for you to spend it

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because it's more of a.
Connected in the same mental category as

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your trip, easier to go ahead and spend
it.

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Now you can also see why a, this notion of
mental accounting is kind of connected to,

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eh, the pain of paying, and how to either
distance or a close cousins.

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Mental accounting, by the way, is also why
we see all kind of strange things in the

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marketplace.
Why we see, for example, leave money in a

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low-bearing, checking account with very
low interest on one hand.

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On the other hand have high-interest
credit card loans or car payment loans.

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And we ask people about it they feel like
these are 2, 2 separate domains.

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These are savings and this is spending,
and you don't differentiate the 2.

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And if you think about all of these
notions of separating money into different

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accounts and spending according to, these
separations.

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It means money in our mind is not
perfectly fungible.

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Money have budgets and depending on our
budget allocation to the different

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categories that will depend our spending.
Now mostly when we think about mental

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accounting we think about as a mistake in
decision making.

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After all one of the main benefits of
money is that is fungible.

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You can switch it from place to place but
people don't treat it as fungible.

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But I would like to argue that mentally
counting is actually a good strategy given

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our inability.
So, what are we asking people to do in

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reality?
We're asking them to think about every

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purchase, how it could translate to all
other purchases.

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If I buy coffee today, what would I not be
able to do?

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If I buy a car today, what I would not be
able to do across all categories.

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Turns out, they're just too difficult to
do.

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So what are people doing?
We are restricting ourselves, and we're

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saying, okay this is probably not going to
be ideal, but I'm going to think only

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about this bucket.
I'm going to assign money to this bucket

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of, you know, let's call it dinners or
entertainment or shopping, clothing.

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Vacations, and I'm just going to think
about it in this, in this bucket.

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Is it optimal?
Of course not.

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Is it leading to mistakes?
Of course, yes.

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But nevertheless it's constraining the
problem.

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It's creating boundaries for it that are
much more clear and therefore allowing us

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to work better.
So if we were all perfectly rational,

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perfectly rational.
Then mental accounting would not make

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sense.
But given how difficult it is for us to

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think about money mental accounting does
help us to partition the problem and at

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least get one step ahead.
Now, if we're going to create solutions

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for people if we're going to create new
digitized bank accounts and we tell

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people, think better about money.
You can have two approaches.

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You could say, let's create something that
assumes perfect rationality, and let's

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help people think about perfect
fungibility and how to move money between

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accounts and what's the right thing to do.
That's one approach.

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The second approach is to say People are
already adopting this approach of mentally

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counting, maybe it's naturally a good way
for people think about money.

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And even if it's not optimal, and maybe
what we could do is we could captialize on

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this ill built And approach for
partitioning money, and let's help people

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do that better.
So if I think if you think about those two

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approaches.
It's kind of how we are trying to help

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people think better.
Are we trying to get people to think all

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the way to level of perfect rationality.
Or are we taking something that is kind of

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half way into it.
We're taking something that people are

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doing, that is kind of the shortcut that
we already have.

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To think about laughing, just trying to
optimize that.

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From the two types of solutions, I
generally more believe in the, in the

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second one.
I believe that our, we have a better

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chance of succeeding by taking some
natural tendency of processing information

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and building on that, rather than assuming
it doesn't exist and build something that

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is perfect.