Mental Accounting and Saving Behavior

Abstract

This study examines the validity of the mental-accounting concept. Three hierarchical mental accounts are conceptually identified, representing a continuum from most basic (ACCT1) to least basic (ACCT3) needs, and empirically formed. Families are hypothesized to have different marginal propensities to consume from different mental accounts, and two related hypotheses are developed. Using data from 1983 and 1986 Surveys of Consumer Finances, estimates of stock adjustment models indicate that all families at low-, middle-, and high-income level adjusted their savings from real stocks to desirable stocks fastest in ACCT3 and slowest in ACCT1. In the middle-income sample, results showed that savings in ACCT1 at the end of the previous period had the largest negative influence on changes in ACCT2 and ACCT3, and savings in ACCT3 had the least influence on changes in the other two accounts, over one period of time. These findings supported the hypotheses derived from the mental-accounting assumption.