Last week I read an academic journal article that gave me the willies.
It wasn’t a scary medical article. It was about personal finance.
The article, which had the catchy title “Influence of Motivated Reasoning on Saving and Spending Decisions,” described four experiments with a consistent result: subjects with multiple bank accounts spent more and saved less than those with only one account.
This creeped me out because I have, well, the technical term is a boatload of accounts.
I just pulled up Mint and my wife and I have a combined 15 checking and savings accounts. That doesn’t include CDs, retirement accounts, or college savings plans.
Is it possible to get addicted to bank accounts? Would we be saving more and spending less if we consolidated those accounts down to just one?
The journal article, by Himanshu Mishra and three other business professors in Utah and Kansas, seemed to suggest just that. As the paper put it: “Individuals who want to increase their overall proportion of savings should consolidate their earnings into a single liquid bank account[.]”
The pleasures of self-deception
The paper collects four different experiments, but they’re all pretty similar.
Here’s the basic idea. Subjects sat at computers and performed tasks to earn $100. (The money was fake, but to keep it interesting, 2% of participants received actual money and prizes.)
As they earned money, the subjects were asked to deposit it into a bank account. Depending on which experimental group the subject was in, their money would go into a single account or could be split among up to three accounts.
Periodically during the experiment, subjects took a break from solving math problems and unscrambling animal names.
Time for shopping! Subjects could use their savings to buy exciting gear like college t-shirts, stationery, and a movie rental gift card. Over the course of the experiment, subjects could spend up to $40.
You already know the result: when people had the opportunity to use multiple accounts, they spent more.
At the end of the experiment, the single-account group had an average of $86 remaining; the multiple-account group had $80.
What accounts for the difference?
The experimenters call it “fuzziness.” If you have multiple accounts with different balances, you can justify almost any spending decision.
“I’m just spending from account #3. I’m not touching the important money in account #1.” With just one account, however, it’s hard to fool yourself.
When you spend $300, your account balance drops by $300, period.
Say my name
Something bothered me about this result.
Maybe I’m just trying to justify my excessive number of bank accounts, but it seemed to me that people have different reasons for maintaining multiple accounts.
Let’s call them the diversifiers and the mental accountants. I’ll explain:
Diversifiers have multiple accounts because they want to diversify among different banks (FDIC insurance makes this unnecessary, but that’s another topic), or because they like the convenience of a local bank branch and the low fees of an online bank, so they choose both.
The money in the accounts isn’t designated for a specific purpose; it’s all one balance that happens to be spread out into different buckets. This is similar to the experiment described in the “Influence of motivated reasoning…” paper.
Mental accountants use multiple accounts the way some people use cash in envelopes: to separate out money for different purposes. Everybody does (or should do) this with their retirement accounts.
Some of us take it farther and label our accounts as Emergency Fund, Vacation, Clothing, Medical, and so on.
Labeling an account as “Medical,” it seems to me, takes away the fuzziness. It’s hard to think of any reasonable justification for withdrawing $150 from your Medical account to buy a digital camera, unless it’s a laparoscopic camera for taking photos inside your esophagus.
I ran this theory by Promothesh Chatterjee, an assistant professor of marketing at Kansas University and coauthor of the paper.
Might the experiment have turned out differently if subjects had been allowed to name their accounts?
“It may (and there is whole mental accounting literature for that),” said Chatterjee by email, “but we did not explicitly tag any condition, because realistically the tagging has to be done by the customer if she owns multiple liquid accounts.”
The experiment, however, didn’t give participants the opportunity to name accounts. It was about diversifiers, not mental accountants.
A way through the wilderness
Let’s say you’re a diversifier.
You have an account at a local bank for easy ATM and teller access, and it’s linked to another account at an online bank, where you enjoy the higher interest rate on savings accounts and the low fee on international debit transactions.
According to Chatterjee’s paper, you’re likely to save less under this arrangement than if you just pick one bank (one account, even!) and stick with it.
You could switch up your game and become a mental accountant. But there’s another way out of trouble.
As self-serving as it sounds, the professors recommend “utilizing software and services that provide a consolidated view of all of their accounts in one place.”
If you keep your eye on the total account balance rather than the balance of each individual account, it’s harder to talk yourself into hasty spending.
Chatterjee echoed this via email. “We do recommend consolidating accounts using financial software like Mint.com, etc., as a realistic option.” I didn’t tell him to say that. Honest.
Matthew Amster-Burton is a personal finance columnist at Mint.com. His new book, Pretty Good Number One: An American Family Eats Tokyo, is available now. Find him on Twitter @Mint_Mamster.