Existence of mental accounting process in individuals’ financial decisions – A study on behavioral finance based on vignettes with special reference to Palakkad District, Kerala

Abstract

All money is fungible or interchangeable is the assumption of traditional economic theory but in behavioral finance, people attributing different values to the same sum of money based on its origin.  This psychological concept is known as mental accounting. The study uses vignettes (short illustrative story) as s methodological approach to understand the existence of mental accounting process in individuals’ financial decisions. Through the segregation and integration people may compartmentalize their losses and gains. The results of the study show there is existing mental accounting process in individuals’ financial decisions. This concept operates through the framing of financial outcomes, assigning funds to separate mental accounts and also the evaluation of transactions. Mental accounting principles create environments which promote the policy makers can craft interventions and it helps individuals to make rational financial decisions. Marketers can design promotions which are in line with consumers’ mental accounting concepts all this lead overall economic well-being. Mental accounting extended its implications to numerous areas such as personal finance, economic theories, public policies etc.