282. Mental Accounting: Are You Doing It Right? (Refreshed Episode)

Welcome to episode 282 of the Brainy Business. Understanding the Psychology of why People Buy. Today's episode is all about mental accounting. Ready? Let's get started. You are listening to the Brainy Business podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host, Melina Palmer. Hello. Hello, everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Today's episode is all about mental accounting. You're familiar with accounting as a concept, I'm sure, and so perhaps you can gather that this is essentially about how we account for things in our mind. But it isn't just mental math. This is about how we can create separate accounts for for things in our mind that feel concrete, but often aren't. When I give examples in this episode today, which originally aired in the summer of 2019, you're gonna find yourself saying, well, obviously that's how that works. And then when you realize it doesn't have to be that way, it's kind of mind blowing, but in a good way, in a way that helps you to see that our brains make rules all the time and sometimes they're really valuable. Mental accounting is a great thing in a lot of way. It helps us to save money and prioritize things that we might have a harder time with if everything was all lumped together. But it doesn't mean it's the only way or even the right way. It might just be the best way. Our brains are doing it right now. And it's always a good thing when you can know the rules your brain is using to make decisions, as well as that of your employees, peers, customers and more. So why are we talking about mental accounting today? I'm so excited. I had an opportunity to refresh this one, which came up because this Friday I'm joined by Dr. Merle Van Denacker, who runs the Money on the Mind blog. She is an expert on psychology and personal finances. And when she's here on Friday, we're going to talk about how the stress of money and fear of losing a job and inflation and the like can impact employees and what businesses should know about that. That to better support their employees and to understand the economic impact that this kind of stress has on an organization. Even if you don't think it has anything to do with you, it does. We specifically talk about mental accounting in the episode. So I wanted to take the opportunity to refresh this one today because it doesn't come up as often as some of the other episodes, and it deserves a moment in the sun. Before we jump back into that episode, I want to be sure you know that your free Mental Accounting worksheet is in the show notes, along with links to related past episodes, books and articles, many of which hadn't come out when this episode originally aired. It's all waiting for you within the app you're listening to and at the brainy business.com 282 alright, let's talk about mental accounting. The concept of mental accounting was introduced by Nobel Prize winner Richard Thaler and is based on humans illogical approach to value in relative terms instead of looking at it as an absolute. So what does that mean? Let me introduce the concept with three simple anecdotes from one of Thaler's papers on mental accounting, which I've linked to for for you in the show Notes it says First, a former colleague of mine, a professor of finance, prides himself on being a thoroughly rational man. Long ago he adopted a clever strategy to deal with life's misfortunes. At the beginning of each year, he establishes a target donation to the local United Way charity. Then, if anything unexpected happens to him during the year, for example an undeserved speeding ticket, he simply deducts this loss from the United Way account. He thinks of it as an insurance policy against small annoyances. And then there's a little sub point in the paper which says this strategy need not reduce his annual contribution to the United Way. If he makes his intended contribution too low, he risks having uninsured losses. So far, he has not been charitable enough to have his fund cover large losses, such as when a hurricane blew the roof off his beach house. And here's Thaler's next little example. A few years ago, I gave a talk to a group of executives in Switzerland. After the conference, my wife and I spent a week visiting the area. At that time the Swiss franc was at an all time high relative to the US Dollar, so the usual high prices in Switzerland were astronomical. My wife and I comforted ourselves that I had received a fee for the talk that would easily cover the outrageous prices for hotels and meals. Had I received the same fee a week earlier for a talk in New York, though, the vacation would have been much less enjoyable. Lastly, a friend of mine was once shopping for a quilted bedspread. She went to a department store and was pleased to find a model she liked on sale. The spreads came in three sizes, double, queen and king. The usual prices for Those quilts were 200, 250 and $300 respectively, but during the sale they were all priced at only $150. My friend bought the king size quilt and was quite pleased with her purchase, though the quilt did hang a bit over the sides of her double bed. These are all examples of the way that mental accounting can impact the decisions we make. When you heard each of these stories, you might have thought, what a great idea. Or at least agreed with the sentiment. This goes to show just how ingrained in our brains this concept is. You might not be able to see why any of these is technically illogical, because they appear to make perfect sense. And that's what this episode is all about. In the case of the first example, with the money being set aside for charity and a just in case account, it helps the brain feel less irritated by unexpected costs. Even though setting money aside is completely arbitrary, in reality, money and accounts should be perfectly fungible. That's an economics term for interchangeable, essentially for any of you who aren't familiar with it. But if that were the case, it wouldn't matter if money was in a savings account or a checking account, or your pocket or a 401k. It would all exchange exactly the same and separation wouldn't matter. Fortunately or unfortunately, that is not the world we live in. There's a great story the actor Gene Hackman shared about his friend Dustin Hoffman. When they were young and struggling to make ends meet, apparently Hoffman asked Hackman if he could borrow some money, to which the friend agreed. They then walked into the kitchen where there were several jars full of money. Hackman said, why do you need to borrow money from me when there's plenty of cash sitting right there? Hoffman then pointed to the empty jar labeled food as the jars with money in them were set aside for other things like rent and utilities. This is a perfect example of how our brains segregate when thinking about money. And we don't need physical cash in jars to do this. And this is one of the reasons the field of behavioral economics was discovered. Traditional economics does not account for for the importance of this phenomenon. This isn't all bad, but it can get people into trouble sometimes. Like when they have $10,000 in credit card debt at 18% interest and $8,000 in a savings account earning next to nothing. While mental accounting has to do with more than just money, I want to take a moment to share with you the three ways money is commonly labeled. Expenses are grouped into budgets like food, rent and entertainment. These are like the jars Dustin Hoffman had in his house or the common envelope methods for paying things down. Wealth is separated into accounts, checking, emergency or rainy day funds, and retirement. And lastly, income is looked at in categories, namely regular or windfall. I'll dig deeper into each of those concepts as we get into the episode, but first I want to get back to the second of those little stories I introduced at the beginning of the episode. In the second story, Thaler talks about how he was speaking in Switzerland and the money he was paid helped him and his wife to enjoy the trip, even though the conversion rate to Swiss francs was astronomical at the time. At the end, he talks about how if he had been paid the same speaking fee the week before at a conference in New York, it wouldn't have had the same benefit on the trip as it did when they were so closely associated. While this is totally understandable and relatable, it's also completely irrational. Both were paid in US dollars, and if they were the same fee, then the conversion would be exactly the same. So why does it feel different? It's because of this silly little thing called mental accounting. For another example of this, a study was done where people were asked if they would be willing to buy a ticket to a play that week under two scenarios. In the first, they had already gone to a basketball game earlier that week, which cost $50, and the money was also allocated to an entertainment type of budget. In the other scenario, they had gotten a $50 parking ticket earlier in the week, which would of course be a different mental budget of emergencies or something like that. So what happened? You probably know already that those with the parking ticket were more likely to buy the ticket to the play than those who went to the basketball game, even though of course both monetary losses were for the exact same same amount. Much like regular accounting, in mental accounting, individuals will book and post any occurring or planned transactions to the mental account. However, small items may not be booked in the same way as a big item would be. Just like a business may use petty cash, as long as it's below a certain amount, it doesn't need to hit the mental account. This is why donation requests for just 68 cents a day can be more effective than asking for all that to be donated in one lump sum of $250. This is of course framing an action again. And similarly and in reverse, when trying to diet, it's a common suggestion to use the money from eating out or getting that daily chai tea latte to take a vacation or buy new clothes. Once you hit your size goal. $5 a day may not seem like much when you're enjoying that treat, but it adds up to almost $2,000 in a year. When I was a kid, I used to run to the door to be able to greet my dad when he came home before my sister could get there. Yes, I love my dad and I wanted to see him, but there was a secondary benefit. He always used full bills when paying for things. And that's another thing in mental accounting of paying with bills, breaking a 20 versus smaller bills and using change. But whoever was there first, and it was probably me at least 80% of the time, would get to keep all the change in dad's pocket. Sometimes it was nominal, but occasionally it was 2, 3, 4 dollars, which is significant to a 9 year old and much better than the chores I would have had to do to earn that kind of cash. Why did my dad see change as throwaway money instead of how it would have felt if it was still in its paper form? If those were bills instead of dimes, they would not have made it into my hot little hands. If they spend the same though, why didn't he think of them the same? This shows the genius behind things like the Keep the Change account from bank of America. In this account, every time you swipe your debit card, the purchase is rounded up to the nearest dollar and those spare cents are deposited automatically into a savings account. The user doesn't even need to think about saving, it just happens and takes advantage of their mental accounting. When buying groceries, do you care if it's $112.16 or an even 113? Of course not. But would you take the time to manually move over a couple bucks a day? Probably not. And if you felt it more, it would trigger loss aversion and cause a whole mental riot that would keep you from actually saving the money. And a lot of businesses like grocery stores have taken on this tactic where they will ask you if you want to round up to donate to some sort of charity that they're sponsoring. Again, taking advantage of that mental accounting As a quick reminder, I've linked to the episodes on loss aversion and framing and relevant studies for you in the show notes along with your freebie worksheet to help you go through this episode on mental accounting. This kind of thinking can also come up when businesses are reporting their year end earnings and losses. They always want to have a positive year end, which could make it tempting to hold on to losses until the next year when you can make it up or reduce a big win to carry into the next year and help you set it off on the right foot. Or if it's looking like you're going to have a bad year and take a loss, general wisdom would be to throw in as much negative and expense as you can. This is known as taking the big bath to help next year be better. One bad year is a blip, but two is a trend. The thinking here is that if it's good going to be negative, you might as well have it all come in at once. After all, if people are going to be upset, you might as well pile on and only get the griping once, right? Of course this is all on paper and somewhat arbitrary as to where the line is drawn in the sand, but it definitely impacts decision making, confidence and the years to come I want to take a moment to talk about how this impacts the use of credit cards and debt. I'm going to keep it brief because I have a whole episode on the pain of payment coming in a couple weeks. However, similar to the process of rounding up change at the grocery store, adding a small amount to an already large payment doesn't feel the same as having that payment on its own. This is because of decoupling, where you remove the pain of the payment away from the joy of the purchase. Studies show people who pay in cash are much more likely to remember the exact amount they paid for something compared to those who put it on a credit card. And even when it's a much larger amount than rounding up to the nearest dollar, say 50 bucks, when it's being added to a credit card balance of $1,500, it doesn't feel like it's as significant, especially if you're paying the minimum payment. It only adds a couple bucks to your monthly bill. This type of mental accounting is a dangerous place to play and gets a lot of people into trouble. It's easy to think we're doomed because time discounting will keep it. So we're always more interested in the small gain today over the big gain tomorrow, or that we want to get the joy of the purchase today and put it onto the credit card payment forever. However, there are some times where people significantly prefer to prepay over delaying their payments. Specifically when getting something they will have a lot of joy from, like a vacation. People would prefer to pay the whole thing in advance, similar to Thaler's trip to Switzerland. Vacations are enjoyed more when they are prepaid because it feels free. When paying for a vacation before you go, you have the excitement of planning and all the fun you'll have and what a great experience it will be. So it doesn't hurt as much after the trip is over though. Feels like you're paying for nothing because the enjoyment already took place and you kind of forgot about it. Really think about this in terms of your vacation. So let's say you're going to Europe and you're paying $5,000 for this trip. And so you set aside and you pay $1,000 every month. And then you go on your trip and you enjoy yourself and you come back and you can just have the memories of what a great time you had. Wonderful. Let's say you don't pay anything. You go on your trip, you have a good time, and then towards the end of the trip you start to think about, oh man, I'm gonna have to pay for this. And maybe you don't go on an excursion or you don't go do something you really want to because it's gonna add another $50 onto this event and you're gonna have to pay it all when you get back. And then when you get home, you've got a bill waiting for for you. Your first thousand dollar payment is due next week. Does it feel a lot worse? Yeah. And it impacts the joy you're able to experience on the trip. So with your own work, think about the benefit that might come from people paying in advance versus paying later. And to show you times where you do want to pay later, this is completely different than if you were paying for say a washer and dryer, which most people have no problem making payments on. After they get those machines, they have the utility and benefit of the machine each time they use it, which helps justify the ongoing payments in their mental account. This is the same with homes and cars, as long as they're not purchased as part of a midlife crisis. But more on that in the pain of payment episode. Again, the lesson here is that there are times when prepayment is necessary and beneficial for the overall enjoyment enjoyment of an experience. This is why all inclusive vacations, gambling at the casino with chips instead of cash, or pre buying tokens for wine tastings work particularly well. The cost associated with buying the item has been taken care of before the experience takes place, which makes it feel free while it's being consumed, which helps the person to enjoy it more. This is also why paying for things using foreign currency feels like play money and doesn't have the pain of paying in the same way. Plus it's been deducted from your mental account at the time that you maybe pulled it out of the ATM or went to the bank and converted it into the new currency, it all feels disconnected. Even when the money still has the same value in each form, whether it's in an account or cash in your hand, and whether it's dollars or euro, it's really all the same. How does this apply to purchases that feel like an investment? Thaler did a study back in the 80s and asked people, suppose you bought a case of good 1982 Bordeaux in the futures market for $20 a bottle. The wine now sells at auction for about $75 a bottle. You've decided to drink a bottle. Which of the following best captures your feeling of the cost to you of drinking this bottle? The five possible answers were $0, $20, $20 plus interest, $75 and $55. The logic behind that being you drank a $75 bottle for which you only paid $20. In purely economic terms, the correct answer is 75, but in fact more than half said drinking the bottle either cost nothing or actually saved them money. They then went on to run a follow up study which asked suppose you buy a case of Bordeaux futures at $400 a case. The wine will retail at about $500 a case when it's shipped. You do not intend to start drinking this wine for a decade at the time that you acquired the wine, which statement more accurately captures your feelings? 1. I feel like I just spent $400, much as I would feel if I spent $400 on a weekend getaway. 2. I feel like I made a $400 investment which I will gradually consume after a period of years or three I feel like I just saved $100. The difference between what the futures cost and what the wine will sell for when delivered. The study found that the typical wine connoisseur thinks of the initial purchase as an investment and later thinks of the wine as free upon consumption. This inspired Shaffir and Thaler to name their paper Invest Now, Drink Later, Spend Never and I've of course linked to it in the show notes. The big thing to realize here is that the way the consumer uses their mental accounting transforms a hobby that could be very expensive into one that is seen as free. When prepayment comes into play, like when investing in a timeshare, the impact of the payment gets completely wiped off the mental accounting sheet, so its impact on the experience becomes zero. This is how we get things like sunk costs, but those are not always felt properly. Consider you bought a pair of non refundable shoes that felt great in the store, but then you tried to wear them and they hurt a lot. Maybe you waited a few days and tried again and they hurt even more. The amount you paid for them will influence how long they stay in your closet. Thinking about how you might wear them someday they're in the mental shoe investment account until they eventually depreciate completely and you can justify throwing them out. In some cases. This could be after years and years of not wearing them, but you still remember how much they cost, so you can't bear to throw them away even though they're just costing you more and more in closet Real estate people can and often do create this sort of experience for themselves by wrapping their brain around the expenses. Thaler shares a story of a newlywed couple from Manhattan trying to decide if they should live on the east side, which she wanted because it had better restaurants, or the west side, which he wanted because rents were lower. They opted to live on the west side because the discount on rent would easily cover their taxi rides to the east side for date nights seems logical enough, but once they moved in, they realized they were avoiding going to dinners on the east side because the cost of the taxis in the moment made the whole experience look and feel too expensive. Even though they knew it should be allocated for it was too difficult to do when the money wasn't set aside or already paid out in the rent. They solved the problem by setting aside, also known as prepaying, a certain amount that was exclusively for cab rides. This added it into the mental budget and gave them permission to take advantage of the lower rent as intended. When you hear it spelled out like this, it might seem a little dumb. You may be wondering why do we need to do this? And the initial reaction could be to try and train or coach your customers or clients about the error of their ways and show them how they can be better and why they should not need to look at money this way. That is your conscious brain talking, and it's not the answer. Instead, what I want you to do is internalize how the brain is wired to make its decisions around mental accounting. Think about it in terms of yourself and all the times it's aided or negatively impacted you. And remember that your customers and clients think exactly the same way. Do you sell a product that would do better as a prepayment or a payment plan after installation? How could you use tokens or chips to help with mental accounting when you're selling your product or service? What mental account would your customer be paying for your offering out of? And what are you competing with in their mind? How can you frame your message to fit that mental account? And speaking of accounts, let's talk about wealth. As I mentioned earlier in the episode, expenses are thought about in budgets and wealth is considered in accounts. These should be thought of in four categories. The most tempting and easiest to spend from are the current assets. This is your checking account and physical cash, the stuff you routinely spend from on a regular basis. It's less tempting to spend from the current wealth category, which is made up of other liquid assets, savings accounts, stocks, bonds, mutual funds, things like that. Your brain has earmarked these accounts for saving money, making you less likely to spend from these accounts than the first tier. Next is equity, like that in a home or a car you own. You could take out a loan and it's less sacred than it used to be. Now that home equity loans and lines of credit are more common. But most people are aiming to pay these things off and it feels more painful to get that money out. So it's only done for a really good reason. Finally, future income is the least tempting category. These are your retirement accounts. When looking at statistics and probability, likelihoods are typically written between 0 and 1, where 1 is basically 100% likely and 0 is no chance, even though money is economically fungible and should be able to move between accounts. Equally, an analysis found that the likelihood people will spend a dollar in the current income account is nearly 1.0, so almost 100%, whereas those in the future income category is close to to zero. Those who have issues with self control should set up accounts that are off limits and put together automatic transfers so they're not tempted. When it comes to wealth in these sorts of categories, people are very influenced by paper gains and losses. Say you bought two different stocks for $50 a share. One went up to $75 and the other's down to $25 a share if you needed to raise some capital. Traditional economics shows you should sell the loser. But mental accounting tells you to sell the winner to avoid the future loss and that you want to hold on to the loser until it regains its past glory and starts making money again. Check out the episode on loss aversion and Booms, Bubbles and Busts for more on those concepts. So how does this impact everyday decisions? Lets say you bought a movie ticket for tonight and it's $10. When you get to the theater, you realize you lost the ticket and there's no way to recover it. Do you buy a second ticket for $10 when Kahneman and Tversky studied this 54% of respondents said no. Then a second group was asked, you plan to go to the movies tonight and when you go to the theater to buy your ticket, you realize you lost a $10 bill. Do you still buy the $10 ticket to the movie? 88% said yes. This is because of how the loss is mentally accounted for. When the loss is associated with the outing to the movies, it's aversive, but when it is not associated with the outing, it's still annoying but doesn't impact the mental account for the movie. Where you keep the money mentally or physically matters, but it also matters how you came across the money in question. Money that you earn in your paycheck is considered different than money you win in the lottery or find on the ground. Gamblers talk about this as house money, and you might see them keeping some money in one pocket and the rest in a different pocket. This is mental accounting at work. Say you go into the casino with $100 and that's all you're going to spend for the outings. You cashed in for chips and then are up 200, at which point you take $100 back and put those chips in your left pocket so you know you're leaving with the money you started with. And the extra money you have in chips is house money. You can bet big with or risk differently than you might otherwise because it was an unexpected windfall. Prior gains make people more likely to take on big risks, but prior losses do not make them more risk seeking unless the new opportunity gives them a chance to break even. Interestingly, the way you got the windfall also matters in how it gets spent. For example, if you inherited $10,000 when a close relative passed away, you may feel more obligated to spend it on something serious than if you won $10,000 playing Wheel of Fortune. So what about dividends? The way you receive the dividend impacts your willingness to spend it. If a business pays out with an increase in stocks, it's less likely to be cashed out and spent than if the individual is sent a check in the mail for the same value in your business. Consider this when you give out bonuses or benefits, how will the mental account allocation impact the way the gift is used? And how does that line up with the intention behind the gift? This is one reason many businesses give gifts in kind instead of cash as part of incentive packages. This is especially impactful when the gifts are luxuries the individual would not buy for themselves but values highly. There are many multi level marketing companies. These were people selling Tupperware back in the day and now there are tons of these like Arbonne and Scentsy and Ideal Protein and everything else under the sun. It seems many people who start with a company like this are doing it as a way to supplement their income. And it's very common to have tiers where you get a prize that you wouldn't buy for yourself, a purse or furniture, vacation, or in some cases even a car. This keeps the earning in a second a separate mental account than cash, and allows the earner to treat him or herself in a way they would not if they were paid cash. While it's easier to give cash than gifts, in many cases, when the gift given is something someone really likes or enjoys, it can have a greater value than giving cash. If you give cash, someone might be tempted to put it into savings, which isn't a bad thing. But if you're hoping they'll spend the money on something they will love, it might defeat the purpose of giving a gift in the first place. Another great example of using gifts for employees is out of the National Football League. For years the league struggled with getting players to come to play in the All Star Game. Many would report injuries or come up with other excuses to skip until it started being held in Hawaii and had a free trip for the player and their significant other. Today there are hardly any no shows. With a minimum annual salary for active rookies at $480,000, these guys can afford to take a trip to Hawaii and being paid the cash equivalent of the trip would not have the same incentive for them. This is why the standard gift giving recommendation is to buy someone something they would not buy for themselves. So if your colleague is retiring and she likes to drink wine, but she typically buys ten dollar bottles to keep it reasonable, you could buy her a $50 bottle to show how valuable you think she is and let her try something she wouldn't buy herself. Why does a single bottle of a wine she's never tried and may not like at all seem like a better gift than five bottles of her favorite wine? Because mental accounting is silly. Oh, and one other tip that's sort of opposite of lumping losses together on a balance sheet or in using credit cards is the concept of multiple gains. While losses should be lumped together, gains should be separated out to really feel their value. The best way I've seen to describe this phenomena is don't wrap all the Christmas presents in one box. Brands can use mental accounting to their advantage in the way they advertise products. Let's say your customers love to drink expensive imported beer and that's what you sell. But they've said it feels too expensive to buy and consume on a regular basis, so they only get it for special occasions. Maybe when on vacation or on holidays. Beer companies have gotten pretty good at showing other special occasions that can count to include encourage customers to buy and consume more. For example, weekends are made for Michelob or Korona's Find your Beach campaign. How can you use this frame on mental accounting in your business? All right, we are getting ready to wrap up the episode. I'm going to close out with a section on mindset and how mental accounting impacts more than money. To talk about mindset, I'm going to ask you some questions from a study. Think about how you would answer each and then I'll let you know what the consensus was. All of these examples are a comparison between Mr. A and Mr. B. Mr. A was given tickets to lotteries involving the World series. He won $50 in one lottery and $25 in the other. Mr. B was given a ticket to a single larger World Series lottery and he won $75. Who was happier? You have your answer. All right. So even though they won the exact same amount, they both won $75. 56 of the 87 people surveyed said it was Mr. A. All right, next question. Mr. A received a letter from the IRS saying that he made a minor math error on his tax return and owed $100. He received a similar letter the same day from his state income tax authority saying he owed $50. There were no other repercussions from either mistake. Mr. B received a letter from the IRS saying that he made a minor math mistake on his tax return and owed $150. There were no other repercussions from his mistake. Who was more upset? If you said Mr. A, you were in the consensus as 66 of the 87 people said that Mr. A would be more upset, even though again, it's exactly the same amount owed. Next, Mr. A bought his first New York State lottery ticket and won $100. Also, in a freak accident, he damaged the rug in his apartment and had to pay the landlord $80. Mr. B bought his first New York State lottery ticket and won $20. Who was happier? You probably said Mr. B. Just like 61 out of the 87 people. Lastly, Mr. A's car was damaged in a parking lot. He had to spend $200 to repair the damage. The same day the car was damaged, he won $25 in the office football pool. Mr. B's car was damaged in the parking lot. He had to spend $175 to repair the damage. Who was more upset? 63 out of the 87 said Mr. B was more upset than Mr. A, even though again, they both had the same net expense. This goes to show how important context is in the way people react. Which is why, in the Truth About Pricing and many other episodes of the show, I talk about how everything that comes before the price matters much more than the price itself. I've also linked to episode eight, what is Value? So that you can really understand that difference between price, cost and value. If you haven't listened to that one already, it's a really great one. How about this next scenario? You're lying on the beach on a hot day and all you have to drink is ice water. For the last hour, you've been thinking about how much you would enjoy a nice cold bottle of your favorite brand of beer. A companion gets up to go make a phone call and offers to bring back a beer from the only nearby place where beer is sold, either a small rundown grocery store or a fancy resort hotel, depending on the version of the study. He says that the beer might be expensive, so he asks how much you're willing to pay for it. He says that he will buy it if it costs as much or less than the price you say, but if it costs more than the price you say, he will not buy it. You trust your friend and there's no possibility of bargaining with the bartender store owner. What price do you tell your friend? The results were dramatically different as people were willing to pay an average of $2.65 if the beer was coming from the fancy hotel versus $1.50 from the rundown grocery store. The really amazing and important thing to note here is by the time the beer gets to the person on the beach, they can't experience the atmosphere or any of the benefits or negatives themselves. And the beer is exactly the same in both contexts and they aren't walking into either location, so why would they pay so much more for the privilege to drink it? This sort of mindset trick is also why people prefer flat rate phone bills over variable ones, even though the variable version is more likely to save them money. In essence, talking on the phone is more enjoyable when you aren't worried about how much it's going to cost you, and going to the gym is easier when you aren't charged by every step you take on the stairmaster and why you're more likely to binge shows on Netflix when you're not paying for them One at a time in the episode on Loss Aversion, I mentioned that when buying cars, people are more likely to get additional features if they're all wrapped in than if they're on a list to add on One at a time One reason for this is the mental accounting involved with the cost of driving the car. Say you really wanted heated seats, but it was $500 extra. You toiled over the decision and decided to splurge the so the cost is pretty well ingrained in your brain. Each time you get in the car and turn on the heated seat, you might be thinking about how that has only knocked a few bucks off your heated seat account, or that the first time you use it, it costs $500 and it'll be $250 each next time. Or maybe you'll feel guilty anytime you don't turn it on. Even when it's really hot outside. Being aware of how the sausage is made can impact your enjoyment of it. Keep this in mind when you present pricing to customers. You may feel like they want and need every little nuance, but it will negatively impact their buying experience and their enjoyment overall in most cases. Now, one other scarce resource impacted by mental accounting is time. I know my husband and I talk a lot about work, life balance and sacred times when we'll both be available to do things as a family. Maybe you have a Tuesday pizza night or a Friday game night, or just every Saturday morning set aside to do something with the family. Labeling that time as only in the family time account makes it so work time isn't even in the consideration of what to do on Saturday morning. Instead of deciding between working and spending time with the family, you're deciding between going to the the zoo or going to the beach. If you struggle with work life balance and want to make more time for yourself or the family or date night, consider how the mental accounts for money were set up. What is in your time checking account and what's in the time 401k is it set up the way it should be? Where could you shuffle your time around to be happier with your choices and be aware of how the brain wants to trick you? Have you ever noticed that it's much harder to get an Uber, Lyft or taxi on a rainy day? You may assume it's because more people are opting to take a car than walk, and that's some of it. But a study found that taxi drivers set their mental account on earnings by an average of what they want to make. Say your goal is to make $250 each day and you have 12 hours available to work. On a slow day, you may need to drive the whole time waiting around for rides, but on a busy day when it's raining or there's a big conference in town, you may hit that goal in only four hours. The crazy thing is, most of the taxi drivers in the original study would go home when they hit the daily goal, so they would work short days when it was busy and long days when it was slow. It would of course benefit them more to work 10 or 12 hours on the busy day and make a higher amount so they can skip the boring slow days and go do something fun. But the mental accounting doesn't always work that way. When you have the lines drawn wrong, are there times where you're wasting high value productive time by celebrating what you got done and then wasting full days that are unproductive? Struggling to just get one thing done before you leave for the day, and staying extra time to get it done instead of just cutting your losses and coming back tomorrow? Try to take a step back and have perspective on what's a waste of time and how you could better allocate your mental time account. Now that you've listened to this episode on mental accounting, you should be able to answer questions like why do firms pay dividends? Why do people buy timeshares? Why are flat rate pricing plans so popular? Why do sales contests have luxuries instead of cash prizes? Why do 401k plans increase savings? Why can't you get a cab on a rainy day? And why do sunk costs matter? So what got your brain buzzing as you learned about mental accounting today? For me, I love thinking about how we compartmentalize information and how some lines become so concrete in our minds even though they're completely made up. It's really fascinating when you start to unpack what a concept like this really means. You know, perhaps this is my love and obsession with metaphor and cognitive semiotics, but really understanding how and why the brain does this and how we make these rules about money and relationships and so many other things is just so cool. What about you? What resonated the most as you learned about mental accounting today? Is there anything you've been doing that you want to stop having as a limit? Maybe changing some boundaries you thought were firm but really not required? Or maybe you want to start doing something to rein yourself in a little bit? Finding a spot where you would like to limit your behavior, and insights from Mental accounting can help you to do that. Whatever your top insight is, will you come share it with me on social media? You can find me as the Brainy Biz pretty much everywhere and as Melina Palmer on LinkedIn. There are easy links to find me in the show notes for the episode, along with related past episodes as I said, many of which came out after this episode originally aired. So it's always kind of a fun little project to see what's in there, what cool stuff has come out since this episode first aired. You'll also find links to books and articles. They're all waiting for you in the app you're listening to and atthebrainybusiness.com 28 and just like that, episode 282 on mental accounting is done. Join me Friday for a brand new episode with Dr. Merle Van Denacker of Money on the Mind. It's going to be a lot of fun. You don't want to miss it. Until then, thanks again for listening and learning with me, and remember to be thoughtful. Thank you for listening to the Brainy Business podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.