Mental accounting
Treating money differently depending on where it came from. A windfall and a salary buy the same things, yet almost nobody spends them alike.
In the chapter
Reviewing, spotting traps and correcting
From the same chapter
- Periodic reviewLooking at the numbers on a fixed schedule, not when you remember. What is not reviewed drifts without anyone noticing.
- Lifestyle inflationSpending more as soon as you earn more. It explains how the salary rises and net worth does not.
- Loss aversionLosing hurting more than winning the same amount feels good. It is what makes people sell at the worst moment and hold what is beyond saving.
- Confirmation biasSeeking only what proves you right. In money it is expensive: it turns a bad decision into a defended one.
- Ponzi schemePaying the old with the money of the new. It works while people keep joining and collapses the day they stop.
- Pyramid schemeYou earn by recruiting, not by selling anything. Arithmetic condemns it: each level needs more people than all the previous ones combined.
- Red flagPromising a fixed, risk-free payout, rushing you, or being unable to explain where the money comes from. Any one of the three is reason enough to walk.