Mental accounting refers to this ability to organize your budget, to think about your money by separating it into different expenditure items. Your brain differentiates money based on how you got it and how you plan to spend it. In other words, you are creating some sort of mental piggy bank where you put your money which will be used for such and such an expense.
Mental accounting can be used to explain how higher savings are derived with various retirement accounts; how high clients purchasing a particular product are willing to spend on credit cards and also explains why brokers hold depreciating stocks longer than appreciating ones due to the mental thought that such depreciating stock will rise at a future time.
