Mental accounting describes how people mentally sort money into separate categories — a "vacation fund," a "grocery budget," a "sunk cost already spent" — and treat those categories as if they were genuinely separate, even though money is, in strict economic terms, completely interchangeable. This produces decisions that don't track the actual math: whether a dollar was already spent, already lost, or newly available changes how it gets weighed, even when the total remaining money is identical either way.
The effect explains a lot of everyday behavior that looks irrational on paper but feels completely natural in the moment — continuing to "honor" a sunk cost, treating a windfall differently from earned income, or feeling a loss more sharply when it closes out a specific mental account than when the identical dollar amount is simply absorbed into general funds.