Mental accounting
This article is part 6 of the ‘Good Thinking Series’ be sure to follow to read the entire series.
How do you feel when you lose some money? Maybe you drop your wallet somewhere.
And how about having to pay a fine to traffic cops for violating a traffic rule? Especially when it is an oversight. You thought you would just sail through the yellow light but are stuck in the middle of the road with the red light. Or you are in a hurry and park at a no-parking zone thinking you will save some time.
I used to feel very bad when I had to pay a fine in these situations. Sometimes arguing with the cops to make them understand which they rarely did. I almost always had to pay a fine.
But worse was I carrying this feeling after this incident and letting it spoil my mood afterward. What was lost was lost and carrying these feelings of anger and frustration did not change anything. In fact, in a bad mood, you don’t have the mental clarity to see if you need to learn something from this incident to minimize the chances of it happening again. In all cases, you lose your mental peace for the day.
Famous behavioral economist Richard Thaler who has won a Nobel prize has suggested a mental trick to counter this tendency to feel bad when we lose some money. This is called Mental accounting. As per this concept of Mental accounting, people treat money differently depending on where it’s coming from, so if you find money on the street, you treat it more casually and spend it more quickly than the money you’ve actually earned. You are not too attached to it because it was just an unexpected bonus.
The parking-ticket example illustrates how you can turn this tendency of your mind to your advantage. You will be deliberately tricking your mind— for the sake of your own peace of mind. One thing is for sure after some loss no amount of mental gymnastics will alter the fact that your money was stolen or you had to pay a fine, but the interpretation of the event—that you can influence.
So how do you do it?
The idea is to come up with an amount, a modest sum to which you’re completely indifferent means even if you lose it doesn’t disturb you. Now you have to treat this money as a contribution to be donated to some good cause at the end of the year. Let’s say come up with x amount per month that you are ok to donate. Keep an annual calendar and keep adding to this amount every month.
Now coming to our immediate problem, anytime you lose some amount because of paying a fine or some other thing, treat this as a coming from your contribution fund which you are accumulating separately. This way your mind doesn’t associate it as a loss as you had money allocated anyway.
The best thing is you don’t lose anything by adopting this attitude, but certainly, gain inner poise for occasional losses. And guess what you will also get a sense of deep meaning for contributing to your favorite cause once a year with the amount left.
Try it for yourself.
This trick is not just true for money but time also. Do you hate standing in queues at the supermarket, waiting at the dentist’s, and sitting in traffic jams? Your blood pressure reaches 150 in seconds, and you start desperately releasing stress hormones.
But next time you are in such a situation instead of getting upset, consider the following: without this unnecessary stress eating away at your body and soul, research predicts you’d live a whole year longer. That extra year would more than makeup for all the time you spent in queues.
So in a nutshell, You can’t nullify the loss of time and money, but you can reinterpret it and make your life instantly better. The more practiced you do with this, the more fun it becomes. Remember, it’s for your own good.
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PS: Here are the links to articles of the rest of the Good thinking series. Enjoy :)
Do you really understand the world?
Are you upset about something which is not serving you well?