Mental Accounts and Spending Money

We all know that money can affect our emotions. But, how do our emotions affect the money? When we receive a sum of money, we automatically put it in a mental account. This is one of the most rigorous findings from the field of behavioral economics. We put a gift in one mental account. We put our salary in another. We put our tax refund in a third. How we handle the money, will depend a lot upon which mental account we have placed them in, in the first place.

We know a lot of examples on how the use of mental accounts can lead to irrational behavior. Perhaps you know about cab drivers that actually work longer when they earn less per hour, and the opposite, work shorter when they earn more per hour?

In the recent years, research has shown us that mental accounts also have an emotional aspect. Namely, our emotional state affects our willingness to spend the money.

Imagine that you receive a letter with the message that you have received a sum of money. They come from a relative. Just a couple of days earlier, you heard that this particular relative had a disease. Do you think that this information would affect your willingness to spend the money?

In a couple of experiments by Peter McGraw and his colleagues, it did. Some participants experienced this scenario, where the money had an obvious negative emotional connection. Other participants instead heard that the money was from a lottery, which gave them a more positive emotional connection to the money.

The result showed us that a negative emotional “label” made the participants spend the money on more useful purposes, for example savings, charity or healthy food. The lottery money, on the other hand, had a positive label and was spent on ice cream or a vacation to a paradise island.

The conclusion is obvious: the emotional label of the money we receive, affect how we spend them.

But as we know, money and emotions is a complex area. We will see one more example.

If you have seen, heard or read A Christmas Carol by Charles Dickens, you know about Ebenezer Scrooge. He is a greedy and self-centered fellow that seems very unhappy. He does not want to spend his money on anyone else than himself. But, after a visit by some charismatic creatures, he changes his way of spending and gives money to charity. He reaches a state that can be described as flourishing.

It is unclear if Charles Dickens had economic psychology and research on happiness in mind, when he wrote the story (actually to pay a debt). But, perhaps we can see that Scrooges way of spending his money, also affected his emotional well-being?

Some ingenious studies show us that depressed people tend to be more self-centered and spend more money on themselves. Just like Scrooge did. But, according to the research in positive psychology, this is a lousy method for increased happiness. To spend money on oneself increases the focus on oneself and leads to increased dissatisfaction, which leads to increased self-centered consumption in an obvious negative spiral.

Ebenezer Scrooge had a visit by three ghosts that helped him change his behavior. All of us can instead rely on psychological research. We know, for example, that consumption can increase well-being if it is done in the right way. When you receive a sum of money, think about the emotional label it gets, and try to put yourself into a positive spiral by spending it on someone else.

Summary:

●      The emotional label money gets, affects our way of spending them

●      Our current mood affects how we spend our money

●      By being aware of the emotional label of our money, we can spend them in a way that benefits us the most: on others

 

 

References: Cryder, C. E., Lerner, J. S., Gross, J. J., & Dahl, R. E. (2008). Misery Is Not Miserly Sad and Self-Focused Individuals Spend More. Psychological Science,19(6), 525-530.

Levav, J., & McGraw, A. P. (2009). Emotional accounting: How feelings about money influence consumer choice. Journal of Marketing Research46, 66-80.

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