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Mental Accounting: Shaping Financial Choices and Behaviors
Abstract
This chapter explores the concept of “mental accounting,” first introduced by Richard Thaler, and its influence on financial behaviors. It aims to understand how mental categorization of finances affects decisions related to spending, saving, and debt management. Through both theoretical insights and empirical data, the chapter reveals how biases arising from mental accounting often lead to irrational financial decisions, such as overspending on windfalls and inefficient debt management. Using primary and secondary data, the chapter highlights potential implications for long-term financial well-being and recommends strategies for individuals and institutions to mitigate these biases and promote better financial outcomes.
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