Field of study which focuses on the psychological factors that affect the way people use, invest, and spend their money. Commonly-cited examples of such factors include:
Often, people make financial decisions based on numbers unrelated to the circumstances in question. For instance, an inexperienced home buyer visits a house for which the seller is asking $150,000. The buyer has done little research for that specific neighborhood, and so has little idea as to whether or not the asking price is a fair one. In all likelihood, the buyer will base his initial offer (and probably any follow-up offers) on the seller's asking price regardless of whether or not that asking price is a viable one for the given property in its given neighborhood. Thus the buyer is said to be "anchored" to the seller's price.
Mental Accounting: Assume that Mr. Smith receives a small $5,000 windfall from playing his state lottery. He decides to take the money and apply it to his credit card balance, which is currently costing him 9.9% per year. If, however, the $5,000 windfall were to come as a result of an inheritance from Mr. Smith's frugal and beloved uncle, Mr. Smith's conscience might instead persuade him to "invest the gift safely" in a CD at his local bank rather than deploy it toward his debts, as that might be more in line with "what his uncle would have wanted." This is "mental accounting" in action: Money is money, yet money from one source is treated / disbursed differently than that from another.
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