The wonder called Mental Accounting!

A trader bought a Nifty Futures lot.

Nifty went up.

He was very happy.

He opened the technical charts.

"Can go up more." said the technicals.

"I may lose the profit I am getting now.", the trader thought.

"But what if nifty goes up much higher from here?"

The trader got caught in the dilemma.

Finally he squared-off and consoled himself by saying

"This much profit is better than no profit."

Next week, he found himself again in the same situation.

He was sitting on profit, fear was in the heart, technicals were saying

"Can go up more."

This time the dilemma was accompanied by his sister - 'doubt'.

Finally, he decided NOT to square-off and hang-on.

This time he consoled himself by saying

"If it falls I will assume I never had the chance of profit in this trade."

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This is a classic case of 'Mental Accounting'.

What is Mental Accounting?

It is 'self-sugar-coating' a bitter or controversial or embarrasing situation or fact or decision so that it is easily accepted by the ego without causing heartburn or hurt-feelings.

It is, rather, justification of things difficult to justify.

Mental Accounting is the murder of Accounting principles.

Here, instead of putting a loss in the debit column you write it off or forget about it!

Mental accounting is mental justification of wrong accounting!

Making loss-making situation look like no-profit-no-loss OR making risky situation look acceptable is what Mental Accounting all about!

Everyday, every trader does Mental Accounting. A trader can go insane without that!

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Let me share with you some more interesting mental accounting examples.

A delivery-based positional trader used to consider his loss as mere temporary transfer of money from his one bank account to his another invisible account and the same shall be returned.

Another trader consoled himself when he lost almost everything he had earned in many years by saying "I have lost nothing. I lost back to market what it had given me. My own funds are still intact."

Yet another trader used to account his losses as fees of expensive seminars to learn big lessons!

A trader used to console himself by saying "These things happen in business."

Another trader used to console himself after big losses by saying "When such big experts like @#$% and *&^% lost in this crash, why should I feel bad?"

A trader used to say "once in a while, chalta hai (it is OK)."

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Mental Accounting can be good as well as bad.

If it acts as a courage-injector to do what technicals and the methods are saying, it is good.

If it is used as an excuse to be indisciplined, it is bad.

If it is used as an excuse for being docile or lame duck, it is bad.

If it is used as a mode to learn and experience, it is good.