Thursday, October 20, 2016

Mental Accounting


Money is an abstract idea. It may have started off as a smarter form of barter, but it has gradually become just a tool of communication. Like words. Money ideally releases potential. We don't think abstractly. We think in stories. Money needs stories in order for people to make decisions. 

Mental Accounting is a term Richard Thaler came up with to describe how we make up stories to control our money decisions. We think about the same $10 differently depending on how we made it, whether it is cash or digital, how we intended to use it, how much other money we have, etc. How we think about it matters.

The advantage of barter was the relational transaction. We could see the story of both sides of the deal. What we have and what we get. As money has made one side of the story more abstract, we need to be very aware of the stories that we tell ourselves.

The story matters as much as the facts, because we act on the story. The facts just bump the story when we stray too far.

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