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In purely rational economic terms, money is fungible. It shouldn’t matter where the $20 in your wallet came from, whether you earned it at a job or found it on the street. But people act as if it does, and in the 1980s the concept of mental accounting emerged. According to this concept, people categorize money they receive by its source, and deposit it in different mental accounts. Money received from a windfall such as winning the lottery would go into one account, for example, whereas money received as income from a job would go in another.
Mental accounting explains why investment bankers tend to spend their bonuses on plasma TVs and exotic vacations but save money from their salaries to buy homes. Over the past few years, Professor Jonathan Levav, working with A. Peter McGraw of the Leeds School of Business at the University of Colorado at Boulder, pursued this idea further and found that in addition to mental accounting, people tend to categorize money according to the feelings they associate with it, a process he calls emotional accounting.
And:
The way people evaluate money becomes more complicated when mixed emotions are involved. Suppose an investment banker received a bonus but knows that a colleague who didn’t work as hard got more money. In this case, the banker is glad he got a bonus but also angry because he feels he was treated unfairly. Meanwhile, a banker who received a bigger bonus than one of his close friends may feel more guilt than happiness.
To assuage such negative emotions, Levav says, people employ various cleansing and avoidance strategies. “If I have negative feelings about money, then I’ll launder it of its negativity,” he says. “This can mean spending it in ways that are virtuous or utilitarian. So I don’t buy the plasma TV for myself, but I might buy one for an orphanage. It’s not just about the product; it’s really about the use.”
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“In essence, people tell themselves, ‘Let me do something good with the money so I don’t feel bad about it anymore,” Levav says. When people are angry — such as the banker who feels he was cheated on his bonus — they tend to set the money aside and give their anger a chance to dissipate. People who feel guilty are more likely to donate the money to charity.
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