Gifted Or Earned, It's Your Money

We often tend to splurge money we receive as a gift, and spend judiciously when it is earned. But money is just a tool and is not supposed to have labels attached to it

- LARISSA FERNAND

I met a family travelling abroad for a month, and the cost of their trip is coming to ₹9 lakh. They told me that they had sold some property and invested the money, and this was the interest on the amount they had invested (after paying tax).

While it is completely their business, and I am certainly glad to see people use their money to enjoy their life, I instantly spotted the behavioural bias we refer to as mental accounting. This is when we assign subjective value to our money. We perceive it differently depending on the source and ease at which it came into our possession.Before I define it in detail, let me share a few examples.

Economist Richard Thaler narrates this story to describe mental accounting. A couple went on a fishing trip and caught some salmon. They packed the fish and sent it home on an airline, but the package was lost in transit. So. they received $300 from the airline, out of which they splurged $225 on a dinner. They had never spent that much at a restaurant before.

Money is not supposed to have labels attached to it. Yet the couple behaved the way they did because in their mind, the $300 was a “windfall gain”. The extravagant dinner would not have occurred had each received an increment of $150.

Psychologist Hal Arkes narrated a story of employees of a firm taken to the Bahamas on a retreat where each was given a cash bonus of $100. Almost all of them headed to the casino. What was interesting was that up to $100, they had no qualms betting. The moment it crossed that threshold, they got more cautious and slowed down or stopped altogether, because they felt they were playing with their “own” money rather than the “free” money. Ironical, is it not? The $100 was their “own” money too, it is just that it was handed to them and never came out of their own pocket.

In the book