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When making decisions, people group gains and losses.The way they choose to form these groupings, called "mental accounting", affects their decisions.Mental accounting is a powerful and intuitively compelling phenomenon.To this point, however, little attention has been devoted to the psychological principles that underlie mental accounting.In this article we explore the psychological processes that set up mental accounts and assign gains or losses to these accounts.We propose that (a) currently active goals set up mental accounts, and (b) gains and losses are weighted into these accounts proportionally to their representativeness to the goal that set up the account.We review existing evidence that supports this goalsrepresentativeness view of mental accounting and describe new studies designed to test these proposals.We also review other choice phenomena (e.g., sunk costs and entrapment) in which mental accounting is involved.We suggest that mental accounting is a useful selfregulatory strategy, despite the fact that it can sometimes lead to irrational choices.
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