A concept first named by Richard Thaler (1980), mental accounting attempts to describe the process whereby people code, categorise and evaluate economic outcomes. Mental accounting theorists argue that people group their assets into a number of non-fungible mental accounts. One detailed application of mental accounting, the behavioural life cycle hypothesis (Thaler, 1992), posits that people mentally frame assets as belonging to either current income, current wealth or future income and this has implications for their behaviour as the accounts are largely non-fungible and marginal propensity to consume out of each account is different.

Another important concept in mental accounting analyses is framing. This concept describes the fact that the way a person subjectively frames a transaction in their mind will determine the utility they receive or expect. This concept is similarly used in prospect theory and many mental accounting theorists adopt that theory as the value function in their analyses.

References

• Thaler, R. H. 'Towards a positive theory of consumer choice' (1980) Journal of Economic Behavior and Organization, 1, 39-60
• Thaler, R. H. 'Savings, Fungibility, and Mental Accounts' in Lowenstein, G. and Elster, J. Choice Over Time (1992)