<\/span><\/h2>\nMental Accounting refers to investors\u2019 tendencies to mentally place goals into different \u201ccategories\u201d. They then assign different portions of their wealth to meet the different goals. For example, suppose you intend to make two large purchases \u2013 a computer and a TV. Instead of assessing your total wealth and deciding on whether it makes sense to make any of the purchases, people with mental accounting would split their wealth and dedicate money to each \u201cgoal\u201d. It is like having two separate savings jars labeled \u201cComputer\u201d and \u201cTV\u201d each, and only making a purchase when one of the jars has accumulated enough money for the item. Mental accounting generally leads to poor allocation of investment funds, however, it is a good way to instill self-control and discipline. For example, by \u201ctricking\u201d yourself to put away a certain amount of your savings in order to achieve a certain goal (e.g. paying off your credit card debt \/ mortgage, saving for children\u2019s education), you are less likely to spend the money and more likely to reach that goal.<\/p>\n","protected":false},"excerpt":{"rendered":"
Psychology plays an important role in investment. Many people (including seasoned investors) don\u2019t realise the influence psychology has on an investor\u2019s decision making. Below, we introduce two concepts that are not only interesting, but also useful in helping you avoid making bad investment decisions: Loss Aversion Here\u2019s an interesting experiment: Given a choice between A)… View Article<\/a><\/p>\n","protected":false},"author":1,"featured_media":2592,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1355","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment"],"acf":[],"yoast_head":"\nThe Crucial Role of Psychology of Investment<\/title>\n<meta name=\"description\" content=\"Loss aversion and mental accounting are two powerful psychology concepts that can lead to poor investment decision making.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" 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<\/p>\n