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MENTAL ACCOUNTING IN BEHAVIORAL FINANCE - Coggle Diagram
MENTAL ACCOUNTING IN
BEHAVIORAL FINANCE
DEFINITION AND PRINCIPLES
Categorization of money
Segregation of gains and losses
Mental budgeting
KEY CONCEPTS
Sunk Cost Fallacy
: Continuing investment due to prior investment
House Money Effect
: Riskier behavior with "extra" money
Loss Aversion
: Greater sensitivity to losses than gains
Choice Bracketing
: Narrow vs. broad decision-making
BEHAVIORAL PATTERNS
Windfall Gains
: Different treatment of unexpected money
Saving vs. Debt
: Simultaneous saving and high-interest debt
Investment Behavior
: Separate mental accounts affecting investment decisions
Credit Card Spending
: Higher expenditures due to separate mental accounts
PSYCHOLOGICAL UNDERPINNINGS
Prospect Theory
: Risky choices and probabilities
Framing Effect
: Influence of information presentation
Endowment Effect
: Higher value on owned items
APPLICATIONS
Financial Planning
: Strategies aligned with mental accounting tendencies
Behavioral Interventions
: Policies to encourage better financial habits
Marketing and Consumer Behavior
: Influencing behavior through mental accounting principles
CHALLENGES AND CRITICISMS
Potential for irrational financial decisions
Difficulties in overcoming mental accounting biases
Impact on long-term financial health
STRATEGIES TO MITIGATE NEGATIVE EFFECTS
Broad bracketing
Integrating all accounts for a holistic view
Educating about cognitive biases
REAL-WORLD EXAMPLES
Treating tax refunds or bonuses differently from salary
Maintaining a separate account for emergency funds despite needing cash
Riskier spending with gambling winnings