Are Multiple Bank Accounts Nudging You to Spend Or Save?

Among the seven holy grails of behavioral economics is a way of encouraging people to save more and spend less. One idea based on “mental accounting” (pdf) is that people might be less prone to spend if they have multiple accounts. After all, it’s harder to spend your grocery money on Bieber tickets when the two piles of money are kept in separate mental or electronic accounts. People may also shy away from spending because losses from multiple accounts are larger as a percentage of each account, and thus the losses may feel more severe. Imagine you had one account with $8 or four accounts with $2 each. Wouldn’t you be more likely to spend a dollar in the first scenario?

Perhaps not. A new study lead by the University of Utah’s Himanshu Mishra contradicts the conclusions drawn from mental accounting. The theory behind Mishra’s study begins with the idea that people generally want to acquire new things and are motivated to find reasons for spending money on them. When faced with multiple accounts, people are more likely to get “fuzzy’ information about their finances, and this fuzziness gives them more leeway to justify spending money.

In a series of four experiments participants were given the opportunity to earn up to $100. They could choose to save as much of the money as they wanted or spend it on prizes (e.g. a mug). They were then entered in a lottery in which the winner would get their earned cash or prizes. The researchers found that participants who could use up to three accounts chose to spend more money on prizes than participants who had to use a single account. In addition, the final experiment provided evidence that the “fuziness” of multiple accounts helps justify spending. When participants were told a percentage of their spending would be donated to charity, thereby giving them an additional reason to spend, participants with one account significantly increased their spending. On the other hand, those with multiple accounts did not significantly increase their spending, suggesting the fuzziness from their multiple accounts had already provided them with the justification to spend.

Do these findings mean that creating more bank accounts is a fruitless endeavor? Not necessarily. I think there’s a middle ground that allows the implications of both mental accounting and fuzziness to remain plausible. The efficacy of mental accounting is based on having distinct and identifiable accounts — e.g. this money is for rent, this money is for food, this money is for electronics. But in Mishra’s study the accounts were arbitrary, anonymous, and remote. The participant new nothing of them 10 minutes earlier. Because the account had no individual significance, I think you can make the argument that there wasn’t strong mental accounting taking place.

With the above interpretation the takeaway is fairly simple. If you’re arbitrarily depositing money in multiple interchangeable bank accounts, having more than one account may be nudging you to spend more. On the other hand, if you’re using your different accounts for specific purposes, it stands to reason that the mental accounting is making you a saver rather than a spender.
Mishra, H., Mishra, A., Rixom, J., & Chatterjee, P. (2012). Influence of motivated reasoning on saving and spending decisions Organizational Behavior and Human Decision Processes DOI: 10.1016/j.obhdp.2012.10.003
Thaler, R. (1999). Mental Accounting Matters Behavioral Decision Making


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