New re­search: How we think about money is sur­pris­ingly sim­il­ar across 21 coun­tries

Imagine lying on a beach and craving a cold soft drink. A friend offers to get one for you and asks how much you would be willing to pay for it. Would it make a difference whether the drink came from the bar of an expensive hotel or from a cheap corner shop?

In a rational world, it should not. After all, the drink is the same. Yet people are much more willing to pay more when it comes from the hotel. 

Researchers found this pattern across the 21 countries included in a large new international study.

“What changes is not the drink, but the mental account we place it in. At a hotel, we expect it to be expensive, while at a kiosk we expect it to be cheap. So we adjust how much we are willing to pay according to the setting, not just the product,” says Giulia Priolo, a postdoctoral researcher at Copenhagen Business School and one of the researchers behind the study.

The phenomenon is known as mental accounting and describes our tendency to treat money differently depending on where it comes from, what we intend to use it for and the context in which it appears.

“From an economic perspective, a krone is a krone. It has no particular meaning. But psychologically, a krone from your salary, a krone from a tax refund and a krone won in the lottery are not the same. And that is true for people in Denmark, Vietnam, Brazil and Egypt,” Priolo says.

The new study, published in the Journal of Consumer Research, examines whether the classic effects of mental accounting can still be observed on a large scale across countries – and in a financial world that looks very different from that of the 1980s, when the theory was developed.

The research was led by Giulia Priolo of Copenhagen Business School, Federica Stablum of University College London and Martina Vacondio of the University of Trento. Simone D’Ambrogio of the University of Oxford made a central contribution to the statistical analyses, while the project was coordinated by Enrico Rubaltelli of the JDM LAB at the University of Padova.

Money with labels

The concept of mental accounting was developed by the American economist Richard Thaler in the 1980s. The theory became a central part of his work on behavioural economics, for which he was later awarded the Nobel Prize in Economic Sciences.

The basic idea is simple: rather than treating all our money as a single pool, we keep a kind of internal household budget with separate accounts.

There is money for rent. Money for holidays. Money for leisure. Savings that should preferably remain untouched. And then there is the bonus or tax refund that can feel like extra money, even though economically it is no different from the rest of our wealth.

This mental separation can be useful. It can help us stick to a budget and make sure the rent money does not end up being spent on restaurants and entertainment.

But it also means that two identical amounts of money can take on different values in our minds.

A theory from the age of the chequebook

But does a theory about our relationship with money developed in the 1980s still hold true today?

That was one of the questions the researchers wanted to answer. The financial world has changed dramatically since mental accounting was first described.

Back then, money was more tangible. People paid with banknotes, coins and cheques, and finding out how much money you had was not simply a matter of tapping your phone twice.

Today, money is often just numbers on a screen. We pay with our phones, subscriptions renew automatically, and online banking gives us an instant overview of our spending.

At the same time, much of the original research was based on relatively small groups of American college students. The researchers therefore wanted to find out whether the effects still exist in a digital economy – and whether they can be observed in countries with very different cultural and economic conditions.

The way we mentally organise money is remarkably consistent across 21 countries

The study included 5,589 adults from 21 countries, including Denmark, China, India, Brazil, the United States, Egypt and Vietnam.

Participants were presented with seven classic mental-accounting scenarios. Among other things, they were asked to consider discounts, lost tickets, gym memberships and drinks purchased in different settings.

But an American experiment from the 1980s cannot simply be transferred unchanged to present-day Vietnam, Egypt or Morocco.

The scenarios were therefore translated and culturally adapted, while the monetary amounts were adjusted to reflect current local prices and currencies. Rather than directly converting the original dollar amounts into local currencies, local collaborators adjusted the prices to ensure that they were realistic and plausible in each contemporary local context. In some countries, other details also had to be changed. A cold beer, for example, could become a cold drink to make the scenario more appropriate to the local context.

The project also grew far beyond the researchers’ original plans. Initially, they had envisioned including around ten countries, but the network expanded to include collaborators in 32 countries, and the survey was translated into 23 languages. Ultimately, 21 countries reached the predetermined sample size, and more than 100 researchers contributed to the project.

The results were relatively clear.

All seven classic effects were replicated when the researchers analysed the data across countries. In the individual country-level analyses, 133 out of 147 tested effects – 90.5 percent – were statistically significant in the predicted direction.

The effects were generally smaller than in the original studies, but they were still clearly detectable.

In other words, mental accounting had survived both digitalisation and the journey across national borders.

Financial knowledge does not change how we perceive money

You might assume that the more people know about finance, the less susceptible they would be to mental accounting. But the study points in a different direction.

Participants’ financial literacy did not explain any substantial differences in the effects. Nor did age, education or income.

“This is not about being ‘bad with money’. Knowing the maths does not switch mental accounting off,” Priolo says.

That does not mean mental accounting is necessarily a bad thing. Setting aside money for specific purposes can help us manage our finances and resist the temptation to spend money we intended to save.

The problem arises when the same mechanism pushes us in the opposite direction. A large percentage discount on an inexpensive item, a subscription presented as a small daily cost or a bonus that feels like free money can all change how we perceive an expense.

Understanding the mechanism, then, does not make it disappear. But it may make it easier to recognise when it is influencing us.

Richer countries, stronger effects

While an individual’s income did not appear to make a substantial difference, the researchers found a more surprising pattern when they compared countries.

In an exploratory analysis, mental-accounting effects appeared to become stronger as a country’s GDP per capita increased. The relationship continued up to around US$50,000 per capita, after which it levelled off.

The researchers do not yet know why.

“The honest answer is that we don’t know yet,” Priolo says.

She stresses that the analysis was exploratory and therefore needs to be investigated further. The relationship cannot simply be explained by personal wealth, since participants’ individual income made no substantial difference within countries.

One possible explanation is that smaller amounts of money matter relatively more in less affluent countries, leading people to focus more on the saving itself. Other explanations could involve differences in markets, institutions and consumer culture. The researchers also point to the possibility that the classic scenarios, originally developed in affluent Western countries, may simply reflect the everyday experiences of consumers in those countries better.

For now, these are questions that will require further research, Priolo says.