A Study on Mental Accounting: Its’ Role in Personal Financial Planning of Households’ Thaler (1985) established the concept of ‘mental accounting’; according to which individuals tend to mentally allocate their current and future wealth into non- transferable separate compartments. Further, different levels of utility are assigned to each group which has an irrational impact over their consumption and other decisions. Individuals do not consider that the money is fungible. This leads to less than optimum investment decision making. According to the theory, individuals assign different functions to each asset group, which has an often irrational and detrimental effect on their consumption decisions and other behaviours.

1. A Study on Mental Accounting:
Its’ Role in Personal Financial Planning of Households’
Thaler (1985) established the concept of ‘mental accounting’; according to
which individuals tend to mentally allocate their current and future wealth into
non- transferable separate compartments. Further, different levels of utility are
assigned to each group which has an irrational impact over their consumption
and other decisions. Individuals do not consider that the money is fungible. This
leads to less than optimum investment decision making. According to the
theory, individuals assign different functions to each asset group, which has an
often irrational and detrimental effect on their consumption decisions and other
behaviours. The mental accounting bias also enters into investing. To overcome
the mental accounting bias, one must understand that money is fungible
regardless of its origins or intended use. One can cut down on unnecessary
spending of "found" money, by realizing that "found" money is no different
than ones hard earned money. One should also realize that saving money in a
low- or no-interest account is pointless if one still has an outstanding debt
carrying high rate of interest to repay. In most cases, the interest on your debt
will erode any interest that you can earn in most savings accounts, thus,
resulting in an overall decrease in the wealth. Anchoring Bias :An anchor is a
reference point, a rule of thumb or a heuristic that is used by people when
making decisions but may not have any direct or indirect relevance to a
decision, but it nonetheless affects people’s judgments. It is also called an
information processing bias. It also suggests that people have the tendency to
anchor on the first piece of information they receive. Bandwagon Bias:
Bandwagon Bias refers to the tendency, to conform, be a part of the crowd or to
do things because others are doing them or have believed in them. It is the
tendency of individuals to mimic the actions (rational or irrational) of a larger

2. group. Endowment Bias: Endowment Bias means that we tend to attach a very
high value to it whenever we own something, regardless of the actual worth of
the thing. This bias occurs when we overvalue a good that we own, irrespective
of its objective market value. It makes the person demand more to give up an
object than they would be willing to pay to acquire it. Nudging: Nudges are
interventions that maneuver people in particular directions but that also allow
them to go their own way. Nudges subconsciously influence you. These are
very subtle cues from the environment specifically placed to get desired results.
All the famous brands some way or the other, try to nudge the customers
whether it is through their logo, their taglines, their emotional appeal, etc.
Financial decisions are the most important and life-shaping decisions individual
make in their life. The role of mental accounting is established in the domain of
individual behaviour towards money and financial matters. A proper financial
planning involves two things i.e. savings and assets creation for future. Savings
occur when current income exceeds current consumption and savings lead to
assets creation. Given that financial planning remains a major influence of
financial decisions, the role of mental accounts in impacting financial planning
not dealt adequately in literature, especially in the Indian setting. It would also
be important to understand the psychological processes that lead to mental
accounts. The study mainly focuses on association of financial cognition on
households’ personal financial planning and would also analyze the mediating
role of mental accounting between financial cognition and personal financial
planning of Indian households’. The financial cognition is the process of
formation of individuals’ beliefs, attitudes and actions towards financial
thinking and the literature on cognitive ability and financial decisions guided
the study to determine the construct to measure financial cognition.
To analyze the influence of individuals’ financial cognition towards financial
decisions study mainly considered three components, and presents as second

3. order construct of two attitudinal components i.e. financial attitude, risk attitude
and one informative component which include financial knowledge of
individuals. The study considers four components to measure the existence and
association of mental accounting process of individuals’ financial decision
making process and proposes it as a second order construct of mental budgeting,
current income, current assets and future income. The personal financial
planning of Indian households’ measures as a second order construct of six
factors i.e. cash flow management, investment planning, insurance, planning,
tax planning, retirement planning and estate planning.