An investor has her money segregated into checking, savings and investments. The allocation between each category is subjective, yet the investor spends freely from the checking account and not the others. This behaviour can be explained as ________.
A)loss aversion
B)mental accounting
C)overreaction
D)winner's curse

Question

Quizplus · Accepted Answer

This behaviour can be explained by mental accounting, which is the practice of categorizing money into different mental accounts based on subjective criteria. In this case, the investor has categorized their money into checking, savings, and investments, and is treating each account differently, even though the money is all part of the same overall portfolio. This can lead to suboptimal financial decisions, such as overspending from the checking account and missing out on investment opportunities.

An Investor Has Her Money Segregated into Checking, Savings and Investments