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Explain the concept of mental accounting and how it impacts financial decisions.

Explain the concept of mental accounting and how it impacts financial decisions.

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Answer #1

Mental accounting is the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities. It is an imperfect system, yet it allows for the organization of transactional information.

In simple words, the tendency for people to code, categorize, and evaluate economic outcomes by grouping their assets into any numbers of non-interchangeable mental accounts

In this the individuals treat the funds differently and make irrational decisions on their spending.

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