Irrational Mental Accounting

There are certain aspects of economic life, such as expensive hotel internet connections, which can only be explained when we grapple with the bounded nature of our brain.

Contradictory decisions violate an important principle of classical economics, which assumes that a dollar is always a dollar. (Money is supposed to be perfectly fungible). But because the brain engages in mental accounting, we end up treating our dollars very differently. For example, when an experiment asked people whether they would drive 20 minutes out of their way to save $5 on a $15 calculator, 68 percent of respondents said yes. However, when he asked people whether they would drive 20 minutes out of their way to save $5 on a $125 leather jacket, only 29 percent said they would.

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