behaviour
Mental accounting
The rule
In your head, you keep money in little boxes. 'Holiday money' feels different from 'emergency money', even though a rupee is a rupee. This helps when you box money for a goal on purpose. It hurts when a salesman mixes protection and investment into one box.
Where it flips
The same boxing that traps you in a bad ULIP is what makes goal boxes work. The trick is simple. You pick the boxes yourself. Do not let a product pick them for you.
Thaler showed that we do not treat all our rupees the same. Cash 'for the holiday' feels different from cash 'for an emergency'. But a rupee is a rupee. Used well, this is a good tool. Label money by goal, and you save more. You stop touching the school-fee money to buy a gadget. Used against you, it is how a ULIP is sold. Two different jobs, insurance and investing, are tied together. Then you cannot judge either one on its own.
A worked example
A family keeps ₹2,00,000 'emergency' money in a savings account paying 3.5%. At the same time they owe ₹1,50,000 on a credit card charging 42%. The two boxes feel separate. But the maths is clear: pay off the card first. [illustrative]
How to spot it
- ·one product doing two jobs at once
- ·'you get insurance AND returns'
- ·money sitting idle in one box while another box charges high interest
Richard Thaler · Nudge; Misbehaving