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Why they aren’t behavioral economists: Three sociologists give their take on “mental accounting”

Nina Bandelj, Fred Wherry, and Viviana Zelizer write:

Rather than retreat to disciplinary corners, let us begin by affirming our respect for the generative work undertaken across a variety of disciplines. We’re all talking money, so it is helpful to specify what’s similar and what’s different when we do. . . . In this post, we address our closest cousins: behavioral economics and cognitive psychology. . . .

Consider the case of a child’s “college fund.” Marketing professors Soman and Ahn recount the dilemma one of their acquaintances, who is an economist, faced with the option of borrowing money at a high rate of interest to pay for a home renovation or using money he already had saved in his three-year-old son’s low-interest rate education account. As a father, he simply could not go through with the more cost-effective option of “breaking into” his child’s education fund. Soman and Ahn use this story to frame how consequential the emotional content of a particular mental account can be. . . .

How does the sociological approach differ? . . . when managing these accounts, individuals are really managing their relationships with others. The account is thus relational as well as psychological as individuals engage in what we call relational work. In the anecdote of the college savings account, for instance, we find the parents reluctant to dip into money earmarked for their children’s education. Why? Because these funds represent and reinforce meaningful family ties: they include but transcend individual mental budgeting; the accounts are therefore as relational as they are mental. Suppose a mother gambles away money from the child’s “college fund.” This is not only a breach of cognitive compartments but involves a relationally damaging violation. Most notably, the misspending will hurt her relationship to her child. But the mother’s egregious act is likely to also undermine the relationship to her spouse and even to family members or friends who might sanction harshly the mother’s misuse of money. These interpersonal dynamics thereby help explain why a college fund functions so effectively as a salient relational earmark rather than only a cognitive category.

Ok, laugh all you want at the sociology jargon—“salient relational earmark,” etc. No big deal; all fields have jargon. That’s not my concern here. My real point is that Bandelj, Wherry, and Zelizer have a point here. The econ story of bank accounts is all about the liquidity of money. The psych story is all about individual behaviors, what do people do with their money and how do they think about it. The soc story is all about roles and interpersonal relations and institutions. “Behavioral economics,” which is a mashup of econ and psych, doesn’t tell the whole story.

The other thing—and this is important—is that the perspectives coming from these three academic disciplines are not competing; they’re complementary. It’s important that money in different bank accounts is liquid—or, to be more precise, it can be liquid for those people who choose to let it be so. It’s important that people often seem to behave as if there are walls between the accounts, restricting their transactions and “freezing” the money, as it were. And it’s important to understand the social context of these behaviors.

Analogously, in section 5.2 of our paper on rational-choice models of voting, Edlin, Kaplan, and I discuss how the rational model is complementary with a psychological understanding of voters. It’s my impression that Bandelj, Wherry, and Zelizer are in agreement with me on this general point, that patterns of human behavior can be usefully understood in different theoretical frameworks. There’s no “right” or “wrong” framework (although one can come to correct or incorrect conclusions within any framework), rather, each framework gives us a way of thinking about the behavior, and entry points into studying it further.

I talk more about frameworks, and how they differ from theories, here.

P.S. The above post appeared on the orgtheory blog, where I was amused to see that it was followed by a series of ads. Commerce! I guess the blog organizers were hoping that readers of the post would be motivated to spend something from their academic or research accounts.

P.P.S. Now here’s a really funny, or sad, story. I googled *mental accounting* to make sure I was getting the term right, and I ended up at a website called Investopedia (to which I give no link for reasons that will become clear in a moment).

It starts out with a clear enough definition with the pure econ perspective on the liquidity of money:

Mental accounting refers to the tendency for people to separate their money into separate accounts based on a variety of subjective criteria, like the source of the money and intent for each account. . . . Although many people use mental accounting, they may not realize how illogical this line of thinking really is. For example, people often have a special “money jar” or fund set aside for a vacation or a new home, while still carrying substantial credit card debt. . . . Simply put, it’s illogical (and detrimental) to have savings in a jar earning little to no interest while carrying credit-card debt accruing at 20% annually. . . . This seems simple enough, but why don’t people behave this way? The answer lies with the personal value that people place on particular assets. For instance, people may feel that money saved for a new house or their children’s college fund is too “important” to relinquish. . . . Logically speaking, money should be interchangeable, regardless of its origin. . . . The key point to consider for mental accounting is that money is fungible; regardless of its origins or intended use, all money is the same. . . .

But then, comes the twist:

Introducing: Become A Day Trader by Investopedia Academy

In less than a day, learn the tricks of the trade and the traps to avoid. In this self-paced, step-by-step course, you’ll learn to develop a money management strategy which mitigates your risk, capitalize on market movements while keeping your emotions in check, and the 6 most profitable trades for your arsenal. Pre-register for free >>

Whoa! First they’re offering innocuous (if slightly misleading) financial advice, then all of a sudden it’s turned into a scam!

But, hey, not a problem. On their website, they announce:

We are serious about maintaining a company culture in each office that is imaginative and fun. Investopedia’s offices are collaborative, highly engaged, and full of positive energy.

Promoting day trading—the ultimate negative-expected-value financial activity—that’s totally cool as long as you’re “full of positive energy,” right? Or maybe the point is that an “imaginative and fun” company culture compensates for what would otherwise be a pretty demoralizing job. They could share notes with the boys at Caesars on how to most effectively fleece the sheep.


  1. Paul says:

    I think a framework should be able to express a correct theory for their area of application. If for example there is indeed a social dimension of mental accounting, which seems plausible, we should be able to express it with microeconomic theory.

    One of the nice things about micro-theory is that it’s modular. If we have an economic model of the social dimension of mental accounting we can easily plug it into existing games and combine it with different equilibrium concepts.

    Also if there is no economics version of a theory economists tend to ignore it which leads to wrong predictions.

    I don’t know enough about sociology to say on what w are missing out, but someone else does:

    Also your claim that behavioral econ is only psychology and econ is a little to broad. As a sociologist recently told me reciprocity is a sociological concept:

  2. Bill Harris says:

    While it’s not a panacea, check out system dynamics. People have been using it since the 1950s and 1960s to address such integrated situations. John Sterman’s /Business Dynamics/ is a current text on the subject (a bit pricey to purchase unless you’re serious, but likely available from a library near you, at least through inter-library loan).

  3. Jonathan says:

    Another framework would be legal: using standard legal analysis, the father acts as a fiduciary for the kid and has a legal duty to not take money from what is an account set up to benefit a minor (on which an adult is likely listed as trustee under a uniform gifts to minors act). There may be a way to do that legally, which I’ll get to, but first to note the father could be sued. Let’s say the parents break up and as part of the divorce process the other spouse accuses the father of misappropriating the child’s trust account. Legal analysis then extends to taxation as well: you can’t borrow the money without paying an appropriate rate of interest, with the minimum determined and published by the IRS. This is missing in the economist analysis because the imputed rate of interest would diminish or eliminate the spread between what the money would earn in its savings account and the interest rate on other borrowed funds. That is, the father would need to pay not only the interest that would have been earned but interest on the loan to him.

    Arguing about which framework should be applied is a big part of debate and political disagreement.

    • If the account is a formal trust account… sure, but lots of people just set up an account in their own name as “the college fund”. Legally it’s yours, only mentally is it the childs. In that context, failing to use the funds could leave you with less money in the end when the child needs it. A bad situation for the parent and for the child. That’s a failure of the purpose of the mental accounting, illustrating that heuristic reasoning typically works well in restricted but common scenarios, and then actually fails spectacularly outside its domain of applicability.

  4. Corey says:

    Investopedia is an okay resource for business- and finance-related jargon. Just, y’know, don’t take up day-trading.

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