Mental accounting

When they were just starting out as actors, Gene Hackman and Dustin Hoffman were friends.

One day while visiting Hoffman’s apartment, Hackman noticed a few jars filled with cash, lined up on the kitchen counter. Each jar was labeled for example ‘rent’, ‘entertainment’, ‘books’ and so on.

At one point Hoffman asked the friend to lend him some money. Hackman, having noticed the jars and the money, asked him why.

The ‘food’ jar was apparently empty!

This is a great example of the principle of mental accounting behind budgeting.

In mental accounting you budget for different categories and when one category is empty, too bad, you cannot take it out from another. Even though all money is the same (it’s fungible/interchangeable), mental accounting forces you to think it’s not.

I find this non-fungibility idea interesting and a good way for thinking about your energy and discipline too.

When you plan your day, pretending different activities require different mental spaces and energy levels can be useful. It teaches you to stick to your commitments over your feelings in the moment.

Next time you plan your day/week/month, consider mentally accounting for it. It will also help you figure out when is the best time for doing one thing over something else, because it makes your time / energy more scarce.