Mental accounting bias

Mental Accounting Influences How We Spend Our Time

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Jul 03, 2020

We’ve all heard that time is money. Though like money, time is a scarce resource that can be consumed, saved, and invested.1 A question then arises: Are we susceptible to the same cognitive biases we encounter in the financial world when making decisions about time? 

Mental accounting, a theory introduced by Richard Thaler who is a founding father of behavioral economics, is an example of a common bias in finance2 that describes the tendency for people to categorize their money into separate non-fungible accounts — or accounts that distinct from each other. Common accounts include savings accounts, chequing accounts, and retirement accounts, which have funds allocated to them based on their source or intended use and often result in irrational decision-making. 

Mental accounting: how it hurts, how it helps

We have all, at least at one point in our lives, surrendered to mental accounting bias. For example, people often spend money earned unexpectedly — such as lottery winnings or gift money — faster than steadier streams of income, and on items of less importance. People also have a tendency to delay purchases for important items because their mental account for them is depleted all while they continue to spend money on less important things. Undoubtedly, these decisions violate economic rationality, which posits that money is a fungible resource whose value remains constant irrespective of its source or intended use. 

Nevertheless, mental accounting bias can also be helpful in some instances; it’s often what allows people to save money in their emergency, retirement, or children’s education funds. By refusing to use money from these highly important accounts regardless of the circumstances, people are able to protect their futures at a small temporary cost. 

Mental accounting and time

Given the aforementioned similarities between money and time, can mental accounting also influence our decision-making when allocating time? Research suggests that the answer is yes.

It is theorized that after people consume the time necessary to satisfy their physiological needs (i.e. eating, hygiene, sleeping), they allocate time towards either consumption (leisure) or production (work) with the ultimate goal of maximizing their total well-being.3 

One series of scenario-based experiments aimed to better understand how our perceptions of time vary based on if the context is a work-related activity or a leisure activity.4 As it turns out, we treat time gained from the postponement of a work-related activity differently than time gained from the postponement of a non work-related activity. We also have an innate threshold for how much time we spend on work-related tasks; we tend to allocate a majority of the time gained to non-work related activities regardless of the source. Such examples include cancellations of plans and completing a task earlier than expected.

From this research, it is clear that the economically rational assumption that money is fungible is often violated. Additionally, it shows that we have separate built-in mental accounts for work and leisure and that we attempt to balance our activities according to these preset expectations.

So what? How can this knowledge help us?

Practical applications

By recognizing how mental accounting may affect the way we allocate time in our daily lives, we can improve our habits to better achieve our goals. 

A classic example of mental accounting in the real world is the problem of finding taxis on a rainy day. Taxi drivers often have a mental account of a daily income target that they aim to achieve. When it’s wet outside, the demand for taxis is often higher, allowing taxi drivers to hit their daily targets faster and ultimately go home earlier. However, this is not economically rational. After all, if drivers are making money at a faster rate on rainy days, they should work longer on these days, which would then allow them to work less on slower days. 

The lesson from the taxi example can be valuable for those of us who are trying to maximize our productivity. Oftentimes, our mental accounts for work and non-work activities may set limits on how much we work on a certain day. If we are feeling very productive on a certain day, celebrating this productivity may only hinder how much work we can get done. 

Similarly, on days that we are feeling unproductive, struggling to be productive may end up being a waste of time, as this time may be better spent rejuvenating ourselves. Being aware of our mental accounts and realizing that we can transfer time to different accounts can ultimately boost our productivity. If you ever realize that there are times where you are wasting high-value productive time, take a step back and think about how you could better allocate your mental time account. Try to override your mental accounts, adjust your mental budgets to your daily mood, and maximize productivity.

The above application discusses how recognizing that time is fungible can be helpful. In some situations, however, it may also help us to cater to our automatic tendencies. Understanding how we mentally budget time can also help us minimize procrastination. One of the main explanations for why we procrastinate is present bias, which is our tendency to overvalue short-term benefits and underestimate the long-term consequences of a decision, resulting in a search for instant gratification and cognitive dissonance with our goals.5

We may be able to use mental budgeting to our advantage by effectively minimizing the influence of present bias. The results of the study described above show, once we decide our mental time budgets, we often try our best to balance and abide by these budgets. Therefore, employing mental budgets to plan our days may be more beneficial in helping us achieve our goals than traditional day schedules.

For example, let’s say a college student named Jack is planning out his Saturday. Jack, like many, may plan out his day like this:

11:00am – 1:00pm: Homework

1:00pm – 1:30pm: Lunch

1:30pm – 4:00pm: Homework

4:00pm – 6:00pm: Social Time

6:00pm – 8:00pm: Work for club

8:00pm – 8:30pm: Dinner

8:30pm – 10:00pm: Homework

However, if Jack finds himself procrastinating often, he might actually benefit from thinking of his responsibilities in terms of time accounts — 6 hours for homework, 2 hours for club work, and 2 hours for social time, for example. By doing so, Jack’s focus for the day is to stick to these time accounts rather than the schedule.

Finally, another application for this research in our daily lives is managing our work-life balance. If you are someone who often struggles with this, try using mental accounting to ensure you are dedicated to both aspects of your life. For example, if you have a tendency to get absorbed with work or other responsibilities on the weekend, it may help to label a certain time period of Saturday (i.e. Saturday evening) as “family time.” By doing so, your decision on Saturday evening is not whether you should do work or spend time with the family. Instead, the decision will be between going to the aquarium or going on a hike. 

Ultimate takeaways

Mental accounting can be both detrimental or advantageous to our decision-making when allocating both money and time. We must also keep in mind that our preferences for how we want to allocate our time are heavily dependent on various individual and situational factors. Additionally, as Kahneman and Tversky described, it may not even be worthwhile to try to adjust our mental accounting biases because fixing one aspect of the problem may just create other problems.6 Perhaps, the question we need to answer for ourselves is if the benefits from adjusting our time allocation decisions outweigh the cognitive costs associated with making these adjustments.

References

1. Jacoby, J., Szybillo, G. J. & Berning, C. K. Time and Consumer Behavior: An Interdisciplinary Overview. Journal of Consumer Research vol. 2 320 (1976).
2. Thaler, R. H. Mental Accounting and Consumer Choice. Marketing Science vol. 27 15–25 (2008).
3. Becker, G. S. A Theory of the Allocation of Time. The Economic Journal vol. 75 493 (1965).
4. Rajagopal, P. & Rha, J.-Y. The mental accounting of time. Journal of Economic Psychology vol. 30 772–781 (2009).
5. Bisin, A. & Hyndman, K. Present-Bias, Procrastination and Deadlines in a Field Experiment. (2014) doi:10.3386/w19874.
6. Kahneman, D. & Tversky, A. Choices, Values, and Frames 1–16 (2000) doi:10.1017/cbo9780511803475.002.

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