Mental accounting matters

Does the money you put aside for bills have the same value as money you spend on fun and entertainment?

Behavioural economics would say no, because we tend to think differently about money depending on its context. It’s called “mental accounting”, and whilst it has nothing to do with the mental health of your CPA, it is very important to know about if you are running a business.

How ING Direct are using mental accounting

ING Direct in the US have cleverly designed savings accounts that can be split out into mental bank accounts. ING customers can create as many sub-account buckets as they want and call them by a nickname (for example “Trip to Australia”, “New car”, “Rainy Day” and so on). According to the article in The New York Times, ING have introduced the tool to help people reach their savings goals, but this is really about good business because in order to acquire funds through personal savings accounts ING (and all banks) have to overcome some behavioural blockers.

Behavioural blockers

To get us to save more, banks have to overcome our:

  • Tendency to think short-term (i.e. I’ll buy smaller items now rather than save towards a bigger goal)
  • Laziness (i.e. it’s too hard to save so I won’t bother) and
  • “Bunny in the headlights” inertia when overwhelmed by choice (i.e. I get confused by which bank and which accounts I should have so I’ll just stick to what I have).

Behavioural enablers

ING’s new savings site overcomes the behavioural blockers by using the following techniques:

Vividness – we are more likely to act if we can readily comprehend the outcome. By graphically representing the savings goal and allowing the customer to use personal and meaningful descriptors for the sub-accounts, ING are helping make the savings goals come alive. Just think how much more likely you are to save towards “ski trip $2000”, “emergency fund $500” and “new car $25,000” than leaving it all lumped into a generic account.

Hedonic framing – we get a bigger buzz out of separate gains than a single one of equal value. By splitting the accounts into specific goals, ING is improving the customer’s willingness to save because there is simply more opportunity to attain success.

Hyperbolic discounting – our impatience means we tend to like gains that we get now more than waiting for larger gains later. This means we risk whittling away at smaller balances rather than building towards the larger target that might feel too far away. By breaking the goals into specific accounts, we can concentrate on a mix of shorter and longer-term objectives and control our impatience without jeopardising the collective savings target.

Business applications of mental accounting

There is an opportunity for every business to map out the “mental accounting” that applies to their industry in order to look for behavioural blockers and enablers. In short, it’s about making the purchase decision easy for your customer.

Your customer will more readily spend money with you if they feel comfortable about justifying it to the bank manager in their head. So using the same principles that ING are using to motivate spending rather than saving, consider making the benefits of purchase to the customer vivid; encourage payment by credit rather than cash because it separates the pain of cost from the joy of purchase and if your product or service delivers a longer-term payoff, bring some of the benefits forward to ensure the customer gets gains in the shorter term.

Bri Williams runs People Patterns Pty Ltd, a consultancy specialising in the application of behavioural economics to everyday business issues. Bri is a presenter, consultant and author who you can find out more about at, [email protected] or by following @peoplepatterns. Bri’s book, “22 Minutes to a Better Business”, about how behavioural economics can help you tackle everyday business issues, is available through the Blurb bookstore.


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