Malleable mental accounting also allows us to dip into our long-term savings for whatever present need or desire we might have. It allows us to spend on health care when an emergency presents itself. It allows us to make up entirely new budget categories on a whim; even worse, once we have this new line item, spending on it becomes easier in the future. Who knew there was a line item for “Celebrate Surviving Wednesday with Happy Hour” and that it repeated every week?
Sometimes when we do manage to save money in one way, we reward ourselves by spending on unrelated luxuries we wouldn’t normally buy, even though the point of saving in one mental account isn’t to spend from another. When this happens — which isn’t all the time, but often enough — we’re rewarding good behavior with bad behavior that directly undermines the good. Saving an extra $100 one week is a good start, but celebrating the saving by spending $50 on something we wouldn’t have purchased otherwise — like a dinner or a gift— doesn’t help our overall finances.
Another way we engage in creative accounting is known as INTEGRATION. This is when we rationalize that two different expenses are actually one by basically assigning the smaller expense to the same category as the larger one. This way, we can fool ourselves into believing we’re suffering just one big purchase, which is less psychologically draining than one large and one small purchase.
For instance, we add our $200 CD changer to our $25,000 car purchase and consider it simply part of the car. Or we buy a $500,000 house and $600 worth of patio furniture so we can sit on our beautiful new back deck. We frame the whole thing as a house purchase, not separate house and furniture purchases. By combining purchases this way we feel we haven’t incurred two losses — the house and the furniture — from two accounts — housing and home décor. It’s just one. Or, after an exhausting day of shopping, we buy an expensive dinner... and then dessert... and then a drink at the local bar. And we lump all of these indulgences together into a mental account vaguely recognized as “Suckered In by the Holidays Again.”
We also cheat on our accounting by misclassification. For instance, Jane didn’t want to spend money on a gift for her cousin Lou, so instead she spent hours making him a cake. That time and effort has a value: It’s four hours she could have been doing something else, from relaxing to visiting her family to even making money. Financially speaking, is her time worth more than the $15 she could have just spent on a picture frame for Lou? Probably (though there is, of course, emotional value in making a personal gift for family). Speaking strictly of money — which is Jane’s focus — trading $15 for four hours of exhausting work is a bad decision, but one she made because of poor classification.
Our personal mental accounting rules are neither specific nor strictly enforced. They often exist as vaguely unrefined thoughts in our heads, so it is easy to find loopholes when we need or want to find them. As we’ve seen before, when given the choice, most of us will take the easy way out: We’ll choose the most immediately tempting option, then use classification gymnastics to justify it without paying too much attention, even when the decisions we are making mean that we’re cheating ourselves.
There is no limit to the effort people will make just to avoid thinking.
We’re not bad people. Most of us are not consciously greedy, stupid, or ill-meaning by nature. We don’t blatantly or recklessly violate our mental accounting rules, but we do use the malleability of the rules to justify monetary decisions that fall outside those rules. Like cheating on a diet, we take advantage of our creativity and use it to justify almost anything pretty easily. After all, we deserve that ice cream cone since we had a salad for lunch earlier this week, right? And the ice cream truck is a local business to support, isn’t it? And it’s also only summer once a year, yeah? So let’s treat ourselves! Sprinkles!
This is an extract from Dan Ariely's Dollars and Sense published by Harper