Mental accounts: A euro is not always a euro

A euro is a euro. Yet our minds sort money into drawers, and do not treat it the same way depending on the drawer.

That is mental accounting, described by the economist Richard Thaler. Salary money, holiday money, money from the sky.

A one thousand euro bonus is spent more easily than one thousand euros of salary. Yet it is the same money.

The classic trap: keeping five thousand euros in a passbook at three per cent, while repaying a loan at eight per cent. Rates for the example.

The gap costs two hundred and fifty euros a year. Just because the two sums live in different drawers.

Drawers have their uses: an emergency fund you do not touch. But you must know when to open them if the maths demands it.

Second: the endowment effect. What we own seems worth more to us, simply because we own it.

In nineteen ninety, Kahneman, Knetsch and Thaler handed out mugs to half the students in a class.

Those with the mug asked about twice what the others offered to buy it. Same mug, a few minutes later.

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With your investments, it is the same: we overrate what we already hold. One question helps: would I buy it today?

Third: the sunk cost. We persist, because we have already paid.

You paid for a concert ticket. It is snowing, you are ill. You go anyway, so as not to have paid for nothing.

But the money is spent either way. The only question is: is the evening still worth the trip?

It is also called the Concorde effect. The Franco-British plane kept being funded even though everyone knew it would not pay.

On the stock market: "I've already lost too much to sell." The past loss changes nothing about the share's future.

Fourth: the disposition effect. Selling winners too early, keeping losers too long.

Say two shares. One is up thirty per cent, the other down thirty. You need money. Which do you sell?

Most people sell the winner. It offers the joy of cashing in. Selling the other would mean admitting the loss.

In nineteen ninety-eight, Terrance Odean studied thousands of accounts. A winning stock was sold about one and a half times as often as a loser.

And in the same study, the winners sold then did better than the losers kept. The wrong drawer had been emptied.

These four biases share the same root: we judge money by its history, not its future.

Yet the market knows neither your purchase price, nor how the money came to you.

The rule that beats them: look at each euro as if it were brand new. Where would it be best placed, today?

Your past explains your choices. It must not make them.