ABSTRACT
The process of mental accounting leads people to think about each of their investments in isolation. Therefore, people do not think about any benefits or costs associated with the interaction between investments, like diversification and tax swaps. This narrow framing leads to poor asset allocation and too much allocation into an employer’s stock. Mental accounting exacerbates the disposition effect. When this is pervasive in society, past winners can be undervalued and past losers can be overvalued, leading to a momentum pattern in the market. Last, money can make you happier, if you spend it right.
