Mental accounting

[16 February 2006]

By Rob Horning

A dollar is dollar is a dollar—until you think about it for a moment. This article by James Surowiecki, from an otherwise disappointing Forbes package about money as concept, details some of the ways we weight money differently according to how we come by it and the various ways it acquires taint—a process he calls “mental accounting.” Money we earn through a paycheck is different, say, then money we earn selling our old junk on eBay. We’re more willing to spend the latter on impulsive and capricious things, where as we tend to preserve the paycheck for mortgage payments and necessary sundries. To hard-core economists, this is a species of irrational thinking that creates waste and missed opportunities, but it nicely illustrates the fetishism of money that Marx credits with distorting our view of the true nature of social relations. Money is never a transparent instrument, instead it’s a blank slate that we are forever writing our ambitions and our hopes and our fears on, allowing it to transmogrify and take the shape of those things in their most concentrated abstract form. It’s conceptual malleability allows it to reify the most nebulous and intangible things. Money remains potentiality, but a different potentiality depending on context—the potential for leisure when it’s inhereited and set aside as cash, the potential for medical disaster when it takes the form of an HSA. It seems like one of the most concrete ways to undermine the ideology and fetishism associated with money is to resist sentimentalizing it and regard it as sheer quantity at all times; in other words, to think like a hyperrational economist whenever possible. But Surowiecki sees mental accounting as an irrational way we protect ourselves from even more irrational behavior. We build hierarchies of spending and then budget across that hierarchy according to a whimsical, emotionally freighted process. Would a robotically rational process intent on maximizing utility be superior? It seems more likely that the flexibility of expression involved in mental accounting allows one to conceptualize goals that are more important to individuals than making the most money possible. It may be the more we freight money with sentimental significance, the more we undermine the logical underpinnings of capitalism that otherwise straiten our motives.

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