MENTAL ACCOUNTING

 I would like to say an interesting fact. On seeing and understanding this fact, whether you are able to invest rationally or not is not confirmed but it will be confirmed that you will not make mistakes. The credit goes to famous Psychologist, Economist, Noble Prize Holder in 2017 - Richard Thaler after great and continuous efforts since 30 - 40 years. Wonderful thing he says - Firstly" Human Being is Contest Robber by nature" and Secondly he says "Human Being is Lazy by nature". Do you believe such fact? Thirdly he says "There is weird relation with rupee and names it as "MENTAL ACCOUNTING". What is MENTAL ACCOUNTING? Let's see and understand this ...................................

Let us take an example.........

1. Lets play a contest and winner prize is Rs. 10 K. If you won the contest, how would you feel? You would feel happy? Because you had earned Rs. 10 K. 

2. You receive a gift of Rs. 10 K in cash from your Relative. How would you feel? You would feel happy and will say "My goodness .. I received Rs. 10 K in cash". 

3. You lost your Rs. 10 K cash in morning when you came in the Event Hall and after some time, a Man comes on the stage  and asks Whose is this Rs. 10 K??? And you say "It's mine". That lost Rs. 10 K you again received. How would you feel? You would feel more Happy. You would jump and dance. In previous 2 cases, you were feeling happy and now you are feeling more happy and celebrating your received money. 

So, you have received 3 Rs. 10 K. Firstly, you won Rs. 10 K in the Contest. Secondly, You received it from your Relative as a Gift. And Thirdly, Rs. 10 K which was yours, few minutes before had lost, you again regained it. In both 3 Events, you Received Rs. 10 K. In that both  Three Events, have you felt same kind of happiness or More Happiness in a particular Event? In which you have gained more happiness? Yes, you have gained more happiness in that event in which you lost your money and then again received. What would you Remember from these cases, Friends? Geeta of Krishna. Why we are being told Geeta of Krishna? Those who are Psychologist, Economist. Without being Psychologist, it's impossible to become Economist. How detailed Study does they do, Friends........... Let's Understand, how it is....

You have made a big sin and sin is you have not understood "Fungibility of money". Try to understand this concept.

You say your Rs. 10 K which was lost, you received more happiness on being getting it as compared to other events. I agree with you on this and believe that Rs. 10 K is very Dear to you. Next day you go to Super Market to buy some Items and your Bill contains Rs. 10 K each of 3 things. At the time of Payment, you give Rs. 10 K each Separately Thrice to Vendor and says This 10 K is the one which I had won in the Contest, This 10 K is the one which my Relative has given in kind of gift and Lastly, this Rs. 10 K is the one which I had regained it after losing and feels more happier, so give me more Items as I am sacrificing my happiness. Will the Vendor give? Of course not. Why is Happiness different? Did you Understand Friends.... We are Statue of Emotions. What we feel is not important. We go into Fiction Instead of staying in Present and from here itself Making Mistakes Starts in Investment. I don't say that with Mental Accounting you don't make losses. Mostly Through Mental Accounting you make Profits. Do you know what Profits do you make? You are likely to develop quality of Self - Control on yourself. But if when you are trying to Develop Self - Control on yourself means you lack the ability to Control yourself. So WHAT IS MENTAL ACCOUNTING?........

MENTAL ACCOUNTING means you distribute your Money in different Sources. This is by allocating Money for Children's Education, Purchasing Car, Owning House, etc. If the money finishes from one sector, you do not withdraw money from another sector. All Companies follow such Strategy. Because Company wants to control expenses of a Particular Department. Company which follows such Policies, Philosophy... Should be followed by Individuals? Company does this for the purpose of Control. But can we do Self - Control or do Mental Accounting. How do we make Profits and Losses through such Strategy. 

Let's see and try to understand this .....

One more thing I want to speak about Mental Accounting. This is very simple thing. Mental Accounting is such thing that it makes an individual to do Finance and Economic Sin. Peruse it . 

You go into one shop for buying some Items or Products. You are with your Friend. Both wants to Buy some Items. You make Payment through Cash whereas Your Friend uses Credit Card. Who among them will spend more? Of Course, Your Friend. How do you know? Because the same thing we do. Why the expenses raised through Credit Card. This is because when we out pocket our hard cash and we see it, we realize we have earned through a very hard work. Why we became more Happy on regaining the Money which was lost in the previous event? Our brain tells that it's our hard work income. So, when we remove cash from Wallet the same feeling of hard earned money comes in our mind. When we make payment through cash our heart hurts. While we do not realize when making payment through Credit Card. We lack in realization and thus incur huge expenses. This is Mental Accounting. We give money through feeling, emotions or through rational thinking. 

In 2003 when I Firstly realized Mental Accounting. My father wanted to go into a big function. He wanted to buy a suite to wear in a function. My father used to wear a Tailor made Suite. This time my Father decided to wear Branded Suite. He went to shop to purchase which was Rs. 2990. It was huge Price for my Father in 2003. My father realized this is not value for money and should not purchase it. My father did not purchased Suite and came back home. After coming home my mother asked Why haven't you bought Suite? My father said it was too costly. At the same evening, My father's mother - in - law came to meet my Father and Mother. She stayed one night with us. Next day when my father was going to office, she asked to drop her to Railway Station. My father agreed to Drop her. My father was in the way to drop her to railway station, His Mother - In - Law hands over an Envelope of Rs. 10 K. She was very smart women, as she didn't give him at home. If she had done, My mother used to take the Envelope. The same evening my Father arrived home late. My mother asked him Wow.. You purchased Suite. Why my Father bought Suite? This is because he did not considered his own money. He felt it is Mother  - In - Law's Money, so he spended. He Differentiated Money and Money. Such an Individual cannot become Good and Successful Investor. Why does so? In our Culture, we treat our Funds, Money as God, Goddess Laxmi and we insulted her. Our goal in Life is Purushartha which means "Object of Human Pursuit". It refers to Four End Goals of Human Life. It is Dharma, Artha, Kaama and Moksha which means righteousness, moral values prosperity, economic values, pleasure, love, psychological values, liberation, spiritual values. It means Hard Work. And you have to do hard work in above Four Places. In which Artha is very Important. We live in four Varnas which means Grahasthashram, Sanyasashram. You have heard about these. In these Grahasthashram is believed to be most important and in this Earning Money is considered very important. The person who has Funds only remains happy. What sin have you made? You differentiated Laxmi and Laxmi. You treated your Salary as Mahalaxmi and treated Money of Mother - In - Law lesser Laxmi. So if Laxmi is there, she will get angry on you or be happy on you. One respects Laxmi and the other does not. So Let's understand how it impacts us....

It impacts hugely on us and more it gets affected to our Investors. Let's take an Example.

One Individual makes Investment of X of Rs. 50/-. This Rs. 50/-. is the cost. Whereas, on the other hand you make Investment of Y of Rs. 50/-. Both Investments you make Of Rs. 50/- NAV. After some time you need Money. You talks to your advisor and says to tell the price of NAV as he wants to withdraw the money. The advisor tells the price as Rs. 25 of X. What is Happening? You are making Losses. Seeing this you go to your home and asks your Advisor the price of Y. He tells the Price as Rs. 75/-. What Happened? You made Profit. See it carefully. You can withdraw any one of them and satisfy your needs. You can even sell the losses and earn money and can even sell the Profits and earn money. Which Investment would you choose? X or Y. You would sell Y, in which you are earning Profits and has performed good. If other things are similar, would you have to do such thing. 

Let us Understand...

 There is one Father and his two sons. He is friend of yours. But stays far in other city. You know one son is worth and other is not. The son who is not worth is not improving himself. He is getting worse day by day. Your friend kicked off his son from his house. Whom had he Kicked off - Worth son or Not worth son? Of course, Not worth son. Do you kick off the best performing individual from your life. What you did in Investment? You removed good performing Investment. And continued to invest Not performing Investment. Sometimes go to NSE and BSE Website. Whenever IPO comes, what happens in IPO. Every Company's Successful Businessman distributes his company among People. People through IPO purchases the Company and becomes part shareholders. After some days, it gets listed and Trading starts. Through Trading, those people who have invested in IPO incurs Profit or Loss. Mostly what People do? Whenever Profit, Investors gain, they sell those stocks in 2-3 days and those who make loss, remains invested. What is the Impact? In India, whichever Company has come through IPO, all are listed. There came such great Companies which made 30 -50-70 crores from Rs. 10 K. But Public doesn't have those Companies. Because with small profits, you sold those Stocks. And there are many such companies which have incurred losses forever. Trading stopped. And prices worsened. Just see in the Annual Report, Promoters have run away whereas, shareholders have sticked to those stocks. So, what you did? You sticked to Loss making Investment and sold Profitable Investments. So, how will you make Money? Why such mistake occured? Mental Accounting. You thought this Loss of Rs. 25 of Investment X was of hard - earned money. So, Why would I sell? In the second Investment you think, Market has earned for me like in the case of Mother - In - Law, so lets make money, if the price lessens it will go away. 

Friends, this is Mental Accounting. The person who does Mental Accounting Invests his funds in Bonds and not in Stocks. So this is a thing of loss. The person who does Mental Accounting keeps his money in F.D. of 7% and borrows Car of 11%.  Because you differentiated money between money.

 Understand. Do not differentiate between money. Money is fungible. It is one and the same. If you understand this, you will become a Successful Investor and you will enjoy life.