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The Damage Mental Accounting Can Do Today

Deep into a multiyear bull run, investors are likely to dedicate more dollars to risk-on assets.

This is the eighth the Behavioral Finance and Macroeconomics series. We will explore the effect behavior has on markets and the economy as a whole--and how advisors who understand this relationship can work more effectively with their clients. (Access previous articles here.)

Mental accounting describes a person's tendency to code, categorize, and evaluate economic outcomes by grouping assets into noninterchangeable mental accounts. A completely rational person would not undertake this psychological process because mental accounting causes people to take the irrational step of treating various sums differently based on where assets are mentally categorized.

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