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Cognitive Biases: Mental Accounting

The psychologist Laurie Santos (Yale University) explains the phenomenon of mental accounting: why we don't always assume that money is fungible. She explores why we set up different accounts for different purchases and how we can use our mental accounting biases to be happier about our financial decisions.

Speaker: Dr. Laurie Santos, Associate Professor of Psychology, Yale University.

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  • piceratops ultimate style avatar for user Christian Laube
    I understand that with setting money aside in a different account and in a way having it allready mentally writen off could help dealing with losses better, but if i would set money aside for charity and then use the money to cover losses i had during the year i would feel like i am cheating the charity, even if i had not made any promises. I know this is not really a question i just wonder if that is just me or if other people feel the same way about this.
    (9 votes)
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    • male robot hal style avatar for user Roy
      I see where your coming from. I think that the video has it the wrong way around though. It's not a 'charity bill', but a 'sure losses' bill, meaning that if anything's left on there by the end of the year, it goes to charity. It's a subtle difference that I think the video missed.
      (9 votes)
  • spunky sam blue style avatar for user joshuanewport8
    I understand the point being made here, but I think the example is poorly chosen.

    A ten dollar bill and a ten dollar movie ticket are not equal. A ten dollar bill can be exchanged for anything that is agreed to have a ten dollar value. A ten dollar movie ticket can generally only be exchanged for entrance into a particular theater at a particular time.

    For example, Let's say I left the theater before the film started and went across the street and saw a really cool toy on sale for ten dollars. Say I change my mind about wanting to see the movie and I want to buy this toy instead.

    In the example where I'm given the ten dollar bill and the ticket, the store across the street will probably only take the ten dollar bill, not the ten dollar ticket, in exchange for the toy, whereas in the example with the two ten dollar bills I could exchange either ten dollar bill for the toy - the value of the ticket can thus be demonstrated to not be identical in value to the ten dollar bill and thus we are correct to not consider the two to be fungible.

    Am I missing something here? This seems to make this example a poor demonstration of the principle in question.
    (6 votes)
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    • piceratops sapling style avatar for user David
      I'd argue the example didn't have as much to do with fungibility as it had with the fact that even though in both cases we were gonna spend the next $10 (on movie ticket) anyway, we regard it differently. In any case, the video argued that the people surveyed actually regarded the movie ticket as more valuable than $10 in cash - because when they lost the ticket itself, they mentally thought they lost more value, and that they cannot afford to get another ticket. While when they lost the $10, they didn't give the cash as much value as in the previous case.
      (4 votes)
  • piceratops ultimate style avatar for user Jonathon
    Do psychologists ever do experiments on people who are NOT college students? Most college students lack useful life experience, but think they are smart. So they will fail common sense tests at a much higher rate than professional people twice their age.
    (2 votes)
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    • duskpin ultimate style avatar for user Leonie  Hauri
      A lot of times college students are used, especially those that are taking psychology classes, because it is easier to get a large group of college students together and many college students may have to participate in some experiments if they are taking psychology classes. Your average group of college students also tends to be diverse, though obviously their age and level of education would be relatively similar, which is a disadvantage (and brings in your points). College students, of course, are not the only people used, and I suspect a lot of experiments mentioning college students are in these videos because the videos were filmed by college professors. That's my guess, anyway.
      (2 votes)
  • blobby green style avatar for user Liudas Čereškevičius
    How is this whole series does not get copyright violations fines? Examples and bias information is pretty much "word for word" stolen from Daniel Kahneman book "Thinking, Fast and Slow"!
    (1 vote)
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Video transcript

(intro music) My name is Laurie Santos. I teach psychology at Yale University, and today I want to talk to you about mental accounting. This lecture is part of a series on cognitive biases. Imagine that you decide to go see a new movie opening up in your town You head to the counter and hand the cashier 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 not in your purse or your pocket. It's just lost. What would you do? 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 decide to see the movie, and you head to the counter and hand the cashier 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. What would you do? 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." We use different accounts in our heads for different activities, and the resources from one account aren't automatically transferred for use in another. This is why we pretty rarely take fifty dollars from our 401k account to have a nice meal, or why we sometimes blow our tax return on stuff we'd never blow our savings on. In our head, we automatically set up different accounts for different stuff, and if we end up with extra money we didn't expect, say from a windfall in a tax return, or even from an unexpected coupon, we end up blowing that money in this new extra account. It's why gamblers gamble a lot more when they're playing with house money. We use different mental accounts all the time, from the money we plan to spend on something fun like movies and plays, to the accounts we keep for our kids' college tuition. Our minds just naturally keep things separate. The problem is that our intuition to keep things separate violates a classic economic principle: the idea that money should be fungible. Classical economist are often puzzled by the fact that we can't just think of money as, well, money. Why shouldn't a ten dollar ticket and a ten dollar bill be the same thing? To an economist, it should be. But for our minds, not so much. The good news is that we can use these funny mental accounts to our advantage. A friend of the behavioral economist Dick Thaler did just this. He set up a new account with money that he planned to donate to charity at the end of every year. Each time something bad happened, a parking ticket or lost ten dollars for a movie, he took the money out of that account instead. His mental accounting caused him to think that the money wasn't really his anyway, and it made him feel less bad whenever he experienced losses. Our biases toward mental accounting mean that our minds don't work in the way that classical economists like to think. But we can use these mental accounting biases to our advantage. We have control over which accounts we set up and which we deduct from Just be sure to remember that the next time you happen to lose your movie ticket. Subtitles by the Amara.org community