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©2018 by Merle van den Akker

Mental Accounting: One Size does not fit All


I have written multiple articles on Mental Accounting. It’s an interesting topic to me (and to many others, I mean, it did win a Nobel Prize…). The articles I have written started out focusing mainly on theory, to then move into my own experiences with it, such as the difference between a British and a Dutch bank account. However, I have found another way that mental accounting could impact how well you budget your money and this way focusses on what payment methods you use. This will not be an article about how mental accounting will be much easier when you pay with cash exclusively. That has been written to death, and, due to my PhD, I am doubting whether it’s true at all. Let’s dive into this.


Within my PhD, I study different methods of payment, focusing on the effect of contactless on expenditure recall and personal finance management. I presented my first study to research groups or during conferences a few times now. During the presentations there tend to be questions: theoretical clarifications or individuals interjecting their disagreement with an assumption. After the presentation there tends to be more open discussion over food or drink on what others think on the topic in more general lines. From these discussions I have gathered some interesting things: for some people contactless has led to forgetting how much was being spent, for others it didn’t make a difference as all their expenditures were being tracked in an app anyway. Some people will never use anything other than cash, because they know exactly how they spend it, others don’t use cash because they cannot recall where it goes, they just notice once it’s gone. Which is exactly the opposite of what you want to achieve within your personal finances!

Now how does this relate to mental accounting? Mental accounting is the process of dividing and keeping track of your different in- and outgoings (in monetary terms). In ‘the olden days’ people did this with cash in actual jars (one for groceries, one for rent/mortgage, one for the kids etc…), but nowadays we live our lives online, through our phones, so even mental accounting has started to look different. We moved from cash to cards and even phones, from contact to contactless and from remembering our spending ourselves to having phone apps tracking it for us.

Now it has always been assumed that deviating from cash would be a bad thing. Theories such as the pain of paying (Zellermayer, 1996) or the transparency framework (Soman, 2003) have argued and proven that cash led to reduced spending and increased awareness of spending when compared to credit cards, pre-paid cards and methods such as direct debit and cheque. Issue with these frameworks and theories is, however: the time they were created.

Timewise, these frameworks are old! Not like Einstein type old, but old for the phenomenon they are trying to capture. I mean, both frameworks still talked about cheques… Now the cheque has been cancelled, but the phone is happy to pay. That is a massive difference. Because a cheque book did not track finances for you, but the phone can.


Now imagine that you are 15 years old. You have been born and raised on contactless card payments (contactless technology is older than you are!). Got your first phone about 5 years ago, and immediately set up payment systems on it and those came with a tracker app, so at least you know where the money from your side job is going and how much you need to earn to be able to buy the newest iPhone. You don’t do cash, it feels like monopoly money to you.

Now imagine you are 65 years old. You were raised on cash, and saw your parents divide money into jars or envelops. You know what household accounting looks like and still remember in which kitchen drawer the expenditure book was kept. Now you have seen all the new payment methods being introduced, you do have payment cards but are not a massive fan, and your kids (who are now definitely adults) have tried getting you into online banking, but honestly you are not fussed. You have read about all the fraud and scam issues. You prefer physical money to online money. And really don’t see what the issue is with having to carry cash around.

Within those two scenarios, who do you think is better at mental accounting, purely based on which payment method they use? Now if you are too inclined to say that the 65-year-old would be better at it, flip the scenario’s round: a 15-year-old using cash and the 65-year-old (with all their experience, because I know that is the hang-up) using exclusively online methods. Their age determined what they are used and what they prefer. And I think it’d be difficult to argue that both should be using cash, which is in line with the original theories on payment methods.


Now let’s discard age, but let’s look at where you are from. During my presentations I meet different nationalities. The Dutch, British, Scandinavian, Canadian and Australians have quickly transformed their payment landscapes to fit contactless and phone-based finance. And for the latter two countries, this has already become the dominant method of payment, across almost all generations. When I present my findings to German, Japanese, or American academics, they just do not relate, regardless of what age group I’m faced with. Their societies are still cash-based and are planning to remain that way (the US is catching up though, they had technological issues with contactless (RFID) but those are being solved). Mental accounting to them is still a cash-based system, a system almost incompatible with that of other parts of the world.

When it comes to managing your mental accounting well, there might not be a one-size-fits-all framework to encompass your experience. It seems obvious that when a German (cash-based) is going to live in the UK (card and contactless-based) there would be a serious period of adjustment, that might involve some not-so-great financial decisions. But the reverse is never questioned. If a Brit were to go to Germany, and is suddenly faced with coins and banknotes, there’d be issues too (ignoring differences between the Euro and Pound as I find them similar enough in value and representation). For someone who is used to online money, constantly tracked expenses and immediately updated balances, cash is a disaster. And this change will impact mental accounting, because it just has become ten times more difficult. This issue works two ways and we should stop ignoring that.


So, take into account what you are used to: cash, card, phone. If that system works for you, stick with it. If that system happens to be 100% online, with every single expenditure tracked in an app, don’t suddenly switch to cash because behavioural economics says so. This might lead to a whole load of new problems, rather than solving any old ones you might have had when trying to mentally account for your finances before!