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Mental Accounting: Shaping Financial Choices and Behaviors

Mental Accounting: Shaping Financial Choices and Behaviors
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Author(s): Razia Nagina (Lovely Professional University, India)
Copyright: 2025
Pages: 34
Source title: Unveiling Investor Biases That Shape Market Dynamics
Source Author(s)/Editor(s): Xu Xiong (City University, Malaysia)and Loang Ooi Kok (Universiti Malaya, Malaysia)
DOI: 10.4018/979-8-3693-9380-2.ch007

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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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