investophobia

Hello friends, my name is Aditya. In our previous topics we have talked about loss aversion theory . It is the most important part of behavioral finance. These are some important financial advice which will help you to take some important financial decision. Mental accounting is also an important part of it.

Mental accounting was introduced by a Nobel prize winner Richard theller. He is from new jersey, U.S. According to this philosophy, people don’t treat money in the equal manner and due to this they will take some wrong financial decision. He says that money is fungible in nature. It means that money is always same. Everyone should follow this philosophy so that they can take some important decisions in their life . Because money is important in each and every aspect whether it is for day to day activities or for investment purposes.

For example, a person has a job and and he is earning 4,000 dollar per month. (3,24,000 rs per month). As it’s his monthly salary, do you think that he will spent half of his money without any kind of second thought? The answer is a big no. Because it is his saving and it helps him to manage his day to day activities. Now come to the second case. Suppose he got 4,000 dollar on a casino game and obviously he is happy for that . But do you think that he will keep that money for managing his day to day activities and any other stuff? The answer is a big no because it is not his savings and it is his one time earning. So instead of keeping that money in his bank account, he wants to spend that money. Here he behaves with that money in a different manner.When his salary was 4,000 dollar per month, he has to think hundred times before spending that money. But now he won that same amount on a casino game and it hames him happy. Because in the first case it is salary and salary is a permanent thing and he expects salary from the company. But in the second case, the money he got from that casino game is not permanent and he did not expect that much amount from it. So when he won that much amount from the game, it made him so happy and he couldn’t able to save or invest that money. and that was not his fault . Because it is a human tendency and even I can’t avoid this kind of nature and iam also a human . Anyone can make this kind of mistake and making mistakes is not a big deal. But you should learn something from your previous mistake and not to repeat that same mistake over and over

I want to share another story which is also another example of mental accounting but this is a real story. There is a show called kaun banega crorepati which airs from Monday to Friday in india.( I think it is a copied version of who wants to become millionaire ). In 2011, a guy named susant Kumar (from india) won rs 5 crore in kaun banega crorepati and he was so happy at that time. But unfortunately he could not able to manage that money properly. He spent those money in some unnecessary activities or took some bad investment decision. Actually he is an intelligent guy. But unfortunately, he couldn’t able to understand the importance money . But if it was his earning, then he would never spent that money in this way.

It is very important to understand the importance of mental accounting. When i got this information from an article, it was like oh yeah it is a simple thing . But now I came to know that yes it is very simple to understand but it is also hard to follow this rule in your day to day life. But if someone has followed this rule properly, then that person can understand the importance of money .