In this video, we delve into the concept of mental accounting and how it influences our perception of money.

Mental accounting refers to the tendency of individuals to categorize and treat money differently based on various factors such as the source, intended use, or specific budget allocation.

This phenomenon can lead us to undervalue money and make irrational financial decisions.

In this example, we explore a situation where a user was willing to spend an additional 1099 rupees to change the color of their phone, increasing the total price from 60900 to 61999.

However, when it came to purchasing a backcase for the phone, the user opted to travel and save ₹700 instead of ordering it online at ₹1000.

The reason behind this seemingly contradictory behavior lies in the concept of mental accounting.

While the user's savings in the backcase scenario were 70%, the savings in the phone color change were only 1.7%.

Despite the higher absolute savings in the phone color change, the perception of a lower percentage saved led the user to overlook the actual value of money involved.

This example highlights how mental accounting can cause us to make biased decisions and fail to recognize the true financial impact of our choices.

By understanding and being aware of mental accounting, we can strive to make more informed and rational financial decisions.

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