Mental accounting (Richard Thaler, via Kahneman) is how Humans — not Econs — organize money and outcomes into separate accounts: spending cash, savings, golf per-hole, ticket vs general revenue. Narrow framing violates comprehensive rationality but helps a finite mind cope.
Key patterns
- Sunk-cost fallacy: paid ticket → drive through blizzard; lost cash → skip show (same economic loss, different account)
- Disposition effect: sell winners, hold losers — loss aversion makes realizing losses painful; rational agent sells worst future prospect
- House money effect / keeping score: prior gains change risk tolerance
- Regret and omission vs commission: worse to act and fail than to default and fail
Thaler's card: "COSTS ARE NOT LOSSES" — reframing changes willingness to pay.
Fix
Broader frames, sunk costs ignored, evaluate portfolio not per-lot. Organizations replace CEOs to reset mental accounts encumbered by sunk costs.