LOSS AVERSION · LEDGER
Mental accounts
One account, but several ledgers in the head
Scores on the four axes
The axis this page explains
Mental accounts
how much money is split by purpose and counted separately instead of as one pool
Answer the questions and your scores on all four axes will appear here.
What it means
You put labels on money. Money earned and money put in are different, and a loss on stock A and a gain on stock B are recorded separately instead of offsetting each other. The account balance is one number, but in your head several ledgers are each keeping their own score.
Splitting money by purpose is not bad in itself. Like keeping living expenses apart from investment money, such divisions clearly protect people sometimes. The problem is when each separate pot becomes the unit of decision. Looked at as a whole, it may already be fine to close out, but you keep holding on because one of the pots has not lost yet.
The most common form is using your purchase price as the line. The price you paid is a personal number recorded nowhere in the market, yet whether it has been crossed becomes nearly the whole decision. This is where the same stock starts to look different depending on your entry price, while the company itself is unchanged.
How it shows up
- When one stock rises and another falls, each one’s win or loss catches your eye before the total
- Money made from investing feels like money you never had, so you use it more boldly
- Your view of the same company changes depending on whether it is above or below your entry price
What research has seen
Thaler called the way people code, classify and evaluate economic outcomes mental accounting. A scene often cited in this framework is the last round at a casino. Because people try to balance the day’s ledger within the day, they choose riskier options as the session nears its end while they are losing. The same trait has also been reported in use to increase saving. The point is that splitting money is not the problem in itself. Where you draw the lines is.
Adjusting the process rather than the temperament
- Once a month, close the per-stock gains and losses and look only at the account total. It is practice in returning the unit of decision to its real size
- Cover your entry price and look only at the company’s numbers now. Whatever reasons remain once the entry price is gone are the real reasons
- Do not give earned money its own name. The moment you remember where it came from, a different standard attaches to it
When not to trust this score
This is not a call to stop splitting money. Keeping living expenses apart from investment money helps most people. What this score points to is not whether you have divisions, but whether the separate pots have become the units of your decisions.
This test measures answers you report yourself, not actual behavior. One thing research on psychological biases has pointed out again and again is that people expect themselves to act more calmly in such situations than they actually do. A low score does not mean the bias is absent.
Axis scores are relative values for comparing the axes with one another. If all four axes come out at 30, it may mean the biases are weak, or that you have not yet been in the situations the questions ask about.
Having a strong bias and losing money are different things. This test does not predict outcomes and gives no answer about what to trade.
More on Jupick
What the other three axes measure
This assessment is reference content that describes investor psychology. It is not a suggestion to trade any stock or product and not investment advice. Investment decisions and their responsibility rest with you.