People sort money into notional accounts and treat fungible funds as non-fungible, which drives otherwise irrational choices.
Thaler's 1985 work. A household will carry credit card debt at 20% while holding savings at 2%, because the money sits in different notional accounts. Tax refunds get spent differently from identical salary increases.
In practice
- A household will not touch the holiday fund to clear a credit card at 22%, because the two are different pots.
- A team ringfences an underspent training budget it cannot use while cutting a role it needs, because the money lives in different lines.
- Further reading
- Wikipedia
- Subject
- Economics & Incentives
- Essay
- The theories behind every argument about money