Mental Accounting
Mental accounting is a behavioral finance concept describing how people categorize funds into separate 'accounts' in their minds and apply different rules to each, rather than evaluating money as a single, fungible resource. This segmentation can influence spending, saving, and investing decisions.
Example: A person treats a $2,000 tax refund as 'extra cash' for a vacation, while continuing to budget monthly income for debt repayment, ignoring the overall impact on net worth.
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