Will you blow your tax refund on something fun? Blame it on mental accounting GlobeInvestor
When Dilip Soman worked in sales, his income came in two forms: salary plus commissions. How much he spent on shelter costs was dictated by the salary component. But how much he spent painting the town red was dictated by the commissions.. While money is fungible, meaning one dollar of salary has the same value as one dollar of commission, we treat money differently depending on various factors, such as the source of the money and how we plan to spend it.
“The cognitive equivalent of accounting is this notion of labelling. You call something ‘fun money’ and it gets spent for fun. You call something ‘serious’ money and it gets spent on serious things.” When there is a mismatch between payment and consumption, we can book mental gains or losses. If we missed attending the cricket match, there would be red in our mental ledger.
Every year around this time, someone chastises the masses over being happy about getting an income tax refund when, in effect, they’ve given the government an interest-free loan for the year.
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