Why Bonuses Vanish in an Instant: The Reality of Mental Accounting

A few days ago, my year-end tax refund hit my bank account. It was only a few tens of thousands of won, but that evening alone, I opened and closed my food delivery app three times. Eventually, I placed an order. The strange thing is, I would never do this on the day my monthly salary comes in. It’s the same bank account and the same amount of money—why is it that I’m so loose with some funds and so stingy with others? As it turns out, this isn’t a matter of willpower; it’s a recognized psychological mechanism.

Why We Label Our Money — What is Mental Accounting?

‘Mental accounting,’ a concept systematized by 2017 Nobel laureate in Economics Richard Thaler, describes how people create separate mental accounts based on the source of money or its intended use, treating the funds in each account differently. Standard economic theory relies on the principle of ‘fungibility,’ which suggests that a 10,000 won bill is simply 10,000 won, regardless of where it came from or where it is spent—a principle so obvious it hardly seems worth naming. However, mental accounting directly contradicts this.

Kahneman and Tversky famously posed a question: If you bought a $10 movie ticket and lost it on the way to the theater, how many people would pay another $10 to buy a new one? Conversely, what if you had lost a $10 bill from your wallet just before buying the ticket? Both scenarios involve losing $10, yet people find it much easier to buy the ticket in the latter case. In the first instance, the loss is felt as having already been deducted from the ’entertainment’ account, making a second purchase from that same account feel like a double loss. In the second, the lost bill is a generic loss that doesn’t belong to any specific mental account, making it easier to stomach.

It would be unfair to dismiss this entirely as an ’error.’ The habit of breaking down budgets into categories helps us get a sense of how much we can spend without complex calculations. The problem is that this convenience often leads to financial losses.

Why We Spend 20 Minutes to Save on a Calculator but Not a Jacket — Transaction Utility

Another example used by Thaler personally resonated with me. A person might be willing to drive 20 minutes to a store to save 5,000 won on a 15,000 won calculator, yet wouldn’t do the same to save the same 5,000 won on a 125,000 won jacket. The absolute amount saved is the same: 5,000 won.

What’s at play here is ’transaction utility.’ Beyond the satisfaction gained from the product itself (acquisition utility), there is a separate pleasure derived from the judgment that “I got a good deal.” Since the discount on the calculator is 33%, the transaction utility feels significant, whereas 4% on the jacket feels trivial. This is why marketers prominently display the ’list price’ next to the ‘sale price.’ They know that by planting a reference point, they can make the discount look larger and open your wallet more easily.

Why Credit Card Bills Don’t Feel Real: Lessons from the 2002 Credit Card Crisis

It’s common knowledge that credit cards increase consumption, but understanding the reason through this lens provides a new perspective. Credit cards separate the ‘moment of purchase’ from the ‘moment of payment.’ In behavioral economics, this is described as a reduction in the ‘pain of paying’—the immediate hurt felt when counting out cash is absent when swiping a card. Furthermore, because a month’s worth of expenses is consolidated into a single bill, the losses are integrated, which diminishes the psychological impact.

This wasn’t just a theoretical concept in South Korea; it was exemplified by the 2002 credit card crisis. Following the Asian Financial Crisis, the government loosened credit card issuance regulations and even removed limits on cash advances to stimulate consumption and prevent tax evasion. Cards were issued indiscriminately to those with unstable or non-existent income, and because the act of swiping didn’t feel like money was leaving one’s pocket, consumption skyrocketed uncontrollably. It eventually escalated into a social crisis with millions becoming credit delinquents. It was, in effect, a nationwide experiment demonstrating how payment methods that decouple the ‘pain of paying’ can easily lead to overconsumption.

Loans are Fast, Debts are Long — Five Illusions Created by Mental Accounting

In her book Mental Accounting, Korean household finance consultant Lee Ji-young points out five common illusions. These include the ‘Income Illusion’ (remembering gross salary as one’s disposable income), the ‘Savings Illusion’ (keeping low-interest savings while carrying high-interest debt), the ‘Consumption Illusion’ (falling for card benefits or sales), the ‘Asset Illusion’ (mistaking one’s home for a liquid asset, leading to ‘house poor’ status), and the ‘Debt Illusion’ (remembering only the principal as debt while treating interest as separate).

Among these, the ‘Debt Illusion’ stood out. Savings take months to accumulate into a lump sum, but a loan can put that same amount into your account in just a few documents. Because of this speed, the author explains that loan money is often labeled as ‘free money’ rather than ‘debt.’ Research also shows that when choosing loan products, people focus more on the ‘monthly payment’—which fits into their habitual budget cycle—rather than the total cost of repayment or the APR. The total amount to be repaid over several years is pushed to the back of the mind.

Separate Gains, Combine Losses — Hedonic Editing

Mental accounting is rooted in the value function from Kahneman and Tversky’s Prospect Theory—a curve where we become insensitive to gains but highly sensitive to losses. Because of this, how we group events changes how we feel about the same outcome. Thaler called this ‘hedonic editing.’ The logic is as follows:

Two small gains are more joyful when received separately. Receiving two 20,000 won gifts feels better than one 40,000 won gift. Conversely, losses hurt less when combined. Multiple small expenses bundled into a single credit card bill create less impact than feeling each one individually. Furthermore, small losses seem less significant when attached to a large gain. Losing 50,000 won in taxes from a 1,000,000 won bonus feels less painful than experiencing them separately. Finally, small gains should be separated from large losses to provide comfort. Receiving a 20,000 won rebate notice alongside a 500,000 won repair bill feels better than just receiving a single 480,000 won bill.

Taking this a step further, there is the ‘House Money Effect.’ Observed by Thaler in poker, it suggests that once people start winning, they treat the money as ‘casino money’ rather than ’their own,’ leading to riskier bets. This is likely the same psychology that makes us take excessive risks when reinvesting profits from stocks or crypto—even though we know that money earned through investment is still our own, it doesn’t feel that way in the moment.

Why Automatic Pension Enrollment Boosts Savings — Nudge and Mental Accounting

Mental accounting isn’t entirely a bad thing. The ‘Nudge’ theory developed by Thaler and Cass Sunstein actually exploits these tendencies. A prime example is automatic enrollment in retirement pension plans. By setting new employees to be enrolled by default and requiring them to opt-out if they wish, participation rates increase significantly because people tend to stick to the status quo.

Tax notification wording works similarly. Research shows that messages emphasizing loss, such as “You will lose this much if you don’t pay,” are more effective than “You get this benefit if you pay faithfully.” This is because the pain of loss is felt more acutely than the joy of gain. Domestic research on insurance enrollment shows a similar pattern. Consumers who pay monthly premiums set a one-month ‘mental accounting period,’ and since the likelihood of needing insurance benefits within that short window is low, the premium feels like a pure loss. This leads to the paradoxical result that the most risk-averse individuals are often the ones who delay insurance enrollment.

So, How Should We Manage These Mental Accounts?

After reading this, I realize I’m not the only one, but knowing about it doesn’t necessarily make it easier to fix. Experts commonly recommend simple methods: creating an integrated budget to view all money as one, setting rules in advance for how to spend unexpected money like bonuses or tax refunds, and regularly reviewing the flow of your total net worth rather than individual accounts. However, I’m not sure if this is a perfect solution. Research on why the intensity of mental accounting varies between individuals and how much personality or cultural background plays a role is still sparse. For now, I think I’ll try mixing my tax refund into my main account this month.