More mental accounting

by | Jul 30, 2019 | Learning Module 4, Topic 7: Behavioral Finance | 0 comments

(This post continues the discussion from a previous post:

This post addresses a different scenario.  Instead of the dilemma created by that impulse credit card purchase, suppose you got an unexpected bonus or a tax refund. We tend to treat this as found money, “bhagwan ka paisa” and go splurge on something.

First, the tax refund. It is your own money, the government simply gave it back to you, did they not? Sometimes it takes them awhile to refund the amount, but that doesn’t make it free money.

Second, the employment bonus was for the hard work you have already done for your organization. Why are you treating at as free?

Third, what if this bonus was not an employment bonus, but bonus shares of a stock you already own. If you go searching for bonus shares, here is an example of what you will find.

Definition: Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

Notice the words like “without any additional cost,” and “free shares.” It creates the illusion that it is “bhagwan ka paisa,” but that could not be farther from the truth. Which is that a bonus share is like a stock dividend, it is part of your income for being a stock holder in the firm. A stock holder in the firm is an owner and is entitled to a share of its profits. Companies distribute these profits to you in different ways: a) as a cash dividend; b) as a stock dividend (bonus shares) and; c) as a stock buyback. This is also not free money.

Again my point is that the source of the money is very important in how treat it and how we spend it. Remember, all money deserves the same respect. That sounds better than the word “fungible” that we economists like to use.

There is an entire topic in a later learning module devoted to behavioral characteristics which you should explore as you feel ready.