Blog 72: Mental Accounting by Xavier Lo, FIA, FRM, MBA

Let me point out something interesting. When you look at your total amount of money that you have, do you subconsciously split the money into different groups, such as having a pot of money for investment [投資], having a pot of money for a new gift [禮物] (such as a TV), and another pot of money for retirement [退休]? There is a famous name for this in behavioural economic theory [行為經濟學]: Mental Accounting [心理會計].

If you think about it logically, money is the same no matter which group it is in. Mental Accounting is a concept where humans treat different groups of money differently, even if it actually doesn’t make financial sense to do so. As a concrete example, some of you may have some money owed on credit cards [信用卡] or personal loans [個人借貸]. At the same time, you would also have a bit of money sitting in your bank account [銀行戶口]. From an earlier blog, you should be able to guess that the interest rate on your credit card is a lot higher than the interest rate in your bank account. Financially, it makes sense for you to pay off the credit card debt with your bank account money. However, a lot of people don’t do this because they manage the money in two different ways.

Yes, I am aware that it sometimes does make sense to split your money this way. Maybe, you might actively not want to pay off your debt because you need emergency cash. The point of this blog is not to discourage you to have different groups of money, it is just important to be aware of this effect and not let it affect your decision making [做決定]. When you’re investing money in a particular company’s shares [股票], you might buy the shares at a few different prices. Mental Accounting might make you have different sell price targets as a result, but you know it doesn’t make sense to do so because its still the same company afterall.

Just watch out for these mental traps, and make sure that you’re in charge of these logical errors, rather than letting them take control of your decisions!

Qualified fellow actuary (in UK and Hong Kong), Financial Risk Manager, and MBA graduate (listed on the Dean's List) with a passion for insurance, data science, and analytics. Experienced in a broad range of insurance roles (pricing, capital modelling, reserving, ERM), along with a touch of knowledge in banking. Member of the General Insurance Committee (2021), Actuarial Innovation Committee (2019 - 2021) in ASHK.

Leave A Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.