Fred just purchased an expensive new refrigerator and is considering purchasing the overpriced warranty. In making his decision on the warranty, Fred ignores better ways that his money could be spent, including paying off high-interest credit card debt. According to prospect theory, the process that leads Fred to ignore the debt and buy the overpriced warranty is

Question

Quizplus · Accepted Answer

Mental accounting refers to the tendency of individuals to categorize and treat money differently depending on its source, intended use, or other psychological factors. In Fred's case, he is mentally separating his money into different "accounts" (e.g., money for appliances vs. money for debt repayment) and not considering the overall utility of his money, leading him to potentially make a financially suboptimal decision by purchasing the overpriced warranty instead of paying off high-interest credit card debt.

Fred Just Purchased an Expensive New Refrigerator and Is Considering