I recently came across the expression ‘mental accounting’. I became an expert in mental accounting during the four years of my articles to become a chartered accountant in the late sixties. At the time the electronic calculator did not exist. Texas Instruments began selling theirs in 1972 and Microsoft released Excel in 1985, so we prepared our ‘T’ accounts, balance sheets, profit and loss statements and tax returns on lined-paper and added up the numbers in our heads. Calculating mentally while preparing financial statements must be mental accounting I thought.
But I then discovered that mental accounting is, in fact, a theory [1] which includes a later extension called prospective accounting, within which yet another theory exists: the double-entry mental accounting theory. [2] Prospective accounting must be mental forecasting without recording the results, but I could not imagine what double-entry mental accounting theory could be. As a qualified accountant, how could I have missed these three concepts.
However, mental accounting has no connection to accountants and accounting. Instead mental accounting describes ways people treat money subjectively. Or to use the definition of the well-known researcher on the subject Richard Thaler:
“Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities.”
Prospective accounting tells us of the anticipated pleasure of buying, against the anticipated pain of paying for it – prospective personal pleasure and pain. It doesn’t prepare plans and forecasts for anybody.
Following the same trend, double-entry mental accounting has no relation to double-entry bookkeeping, except that researchers deliberately borrowed the terminology. And no entries or postings are made. Double-entry mental accounting contrasts the psychological pleasure of buying something against the pain of paying for it. It should be called the double-contrast mental accounting.
Specialists in the economic theory of consumers have borrowed accounting terminology, though I hope not because they have exhausted their own vocabulary.
[1] Mental Accounting: A Systematic Review, April 2022, by Angélica Chiau, University of Minho, Portugal, Ione Cruz, State University of Feira de Santana, Brazil, Graça Azevedo, Universidade de Aveiro, Portugal and Anabela Silva, University of Minho, Portugal.
[2] Prelec, D., & Loewenstein, G. (1998). The Red and the Black: Mental Accounting of Savings and Debt. Marketing Science, 17(1), 4–28. http://doi.org/10.1287/mksc.17.1.4