Mental accounting leads to irrational investment decisions from "summary" of The Little Book of Behavioral Investing by James Montier
When individuals engage in mental accounting, they compartmentalize their money into different categories based on various criteria such as the source of the money or the purpose for which it is intended. This can lead to irrational investment decisions because people may treat money differently depending on which mental account it is in. For example, individuals may be more willing to take on higher risks with money that they consider to be "found money" or money that they see as gains from investments rather than their regular income. Mental accounting can also lead individuals to hold onto losing investments because they have segregated these investments into a mental account for "lon...
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