Question

An investor has her money segregated into checking, savings, and investments. The allocation among the categories is subjective, yet the investor spends freely from the checking account and not the others. This behavior can be explained as _______________.

A) loss aversion
B) mental accounting
C) overreaction
D) winner s curse

Answer 1

B) mental accounting

Step-by-step explanation:

Based on the description provided in regards to the situation, it can be said that this behavior can be explained as mental accounting. This is the act of budgeting and categorizing all of the company's or individual's expenditures. Meaning their purchases of goods or services, usually budgeted into various mental accounts and categories. Such as is the case with the various accounts that the investor has made in order to use for separate expenditures, even though she wastes freely from only one.