Mental Accounting
The Psychology behind investing is argued by many to have serious impacts on the way people invest their money. I could spend all day citing books and the whatnot about the subject but for the moment I will only focus on one part of it.
The idea behind "mental accounting" is that people will treat money differently based on how they account for it in their head. They could have many bank accounts for different purposes or different brokerage accounts for different trading strategies. People (and I am one of them) will be riskier with money in one account but not in another. If they made a lot of money on a stock they might treat that profit as "not their money" and be riskier with it when in reality it is their money and a rational person would treat all their money the same.
When developing and using financial models there are many assumptions that are made. One is that people will behave rationally. This is not always the case. This may not be the worst thing in the world and it certainly doesn't invalidate hundreds of years of financial and economical thought. I am guilty of doing these things probably more so than the average person. I like to invest money and I like following the markets each day. I know that I am no expert by any means but I do know enough to make me interested in it all. I know that I need to save for retirement and other life evens now as opposed to later. I don't want to be too risky with that money so I leave it up to professionals to manage that money for me. However, I like to have a separate account that is under my direct control that I can just buy individual stocks (heck even penny stocks) that catch my interest. I'm not going to call it gambling with that money but some may argue that is whats being done with it.
It is just interesting how people (including me) do this everyday. I really don't have anywhere else that I am going with this. I was just thinking about it and thought I would post something here before hitting the hay. Since its almost a year since my last post...I feel like I needed write something down here. I hope you didn't find it a waste of your time.
The idea behind "mental accounting" is that people will treat money differently based on how they account for it in their head. They could have many bank accounts for different purposes or different brokerage accounts for different trading strategies. People (and I am one of them) will be riskier with money in one account but not in another. If they made a lot of money on a stock they might treat that profit as "not their money" and be riskier with it when in reality it is their money and a rational person would treat all their money the same.
When developing and using financial models there are many assumptions that are made. One is that people will behave rationally. This is not always the case. This may not be the worst thing in the world and it certainly doesn't invalidate hundreds of years of financial and economical thought. I am guilty of doing these things probably more so than the average person. I like to invest money and I like following the markets each day. I know that I am no expert by any means but I do know enough to make me interested in it all. I know that I need to save for retirement and other life evens now as opposed to later. I don't want to be too risky with that money so I leave it up to professionals to manage that money for me. However, I like to have a separate account that is under my direct control that I can just buy individual stocks (heck even penny stocks) that catch my interest. I'm not going to call it gambling with that money but some may argue that is whats being done with it.
It is just interesting how people (including me) do this everyday. I really don't have anywhere else that I am going with this. I was just thinking about it and thought I would post something here before hitting the hay. Since its almost a year since my last post...I feel like I needed write something down here. I hope you didn't find it a waste of your time.
posted by Vitamin Funk @ 10:16 PM
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