This is one of the book I like the most and would recommend to readers who intent to learn more about " Behavioral Finance " in a more practical and laymen terms.

The book opens with one of the biggest psychological traps that people fall into - the idea that dollars aren't created equal and that there are times where they treat a dollar with more value than at other times.

 Here's an example: let's say you were about to buy an item at Store A that cost $100, but you found out that the same exact item is being sold at Store B for $50. Would you switch stores? Now, let's change it a bit - let's say the item at Store A cost $3,050, while the same exact item was on sale at Store B for $3,000 - would you go to the other store then? Most people would do it the first time, but not bother the second time. Why? They look atpercentage, not at the actual dollar amount, meaning that the dollars themselves actually have less value to them.

A person may use different monthly budgets for grocery shopping and eating out at restaurants, for example, and constrain one kind of purchase when its budget has run out while not constraining the other kind of purchase, even though both expenditures draw on the same fungible resource (income). Similarly, supermarket shoppers spend less money at the market when paying with cash than with their debit cards (and credit cards), even though both cash and debit cards draw on the same economic resource.

The story ....

 "By the third day of their honeymoon in Las Vegas ,the newlyweds had lost their $1,000 gambling allowance. That night in bed, the groom noticed a glowing object on the dresser. Upon inspection, he realized it was a $5 chip they had saved as a souvenir.

Strangely, the number 17 was flashing on the chip's face. Taking this as an omen, he donned his green bathrobe and rush down to the roulette table, where he place the $5 chip on the square marked 17. Sure enough, the ball hit 17 and the 35-1 be paid $175. He let his wining ride and once again the little ball landed on 17, paying him $6125.

And so it went, until the lucky groom was about to wager $7.5 million. Unfortunately the floor manager intervene, claiming that the casino didn't have the money to pay should 17 hit again. Undaunted, the groom taxied to a better financed casino downtown. Once again he bet it all on 17, and once again it hit , paying more than $262 million. Ecstatic , he let his million ride - only to lose it all when the ball fell on 18.

Broke and dejected, the groom walked the several miles back to his hotel.

"Where were you?"  as the bride as he entered their room.

"Playing roulette."

"How did you do?"

"Not bad, I lost five dollars."

Another example of mental accounting is the greater willingness to pay for goods when using credit cards than cash, and buy more goods when paying with a debit or credit card than with cash. If people use credit card to pay for tickets to a sporting event, they will tend to be willing to pay more than if they make their bid with cash. This phenomenon is also related to transaction decoupling, the separation of when a good is acquired and when it is actually paid for.

Another example :

We treat our "tax refund ", "birthday money" or Bonuses differently from normal income or pay check ." The very name - "bonus" - suggests a sum of money meant to be seen in a different light than mere ordinary income. Unsurprisingly, many employees are seen spending their bonus money on things they would never be able to justify (to their spouses or to themselves) spending "regular" income on - boats, new cars or lavish vacations, for instance. Of course, nothing says that these types of purchases are bad or irrational. Far from it!

The issue at hand is that all spending - extravagant spending included - should be consciously compared with what the money could alternatively be spent on. If your current financial plan already includes extravagances, feel free to spend bonus money on it! If not, the fact that you have received "a bonus" does not change the other, less exciting things you know are factually more deserving of that money.

As quoted by Adarsh Gopalakrisnan : "A bonus or tax refund cheque is money you've earned. It's not a gift from god or money from the sky.... A credit card needs to be paid. It is not a gift from a rich uncle....

Another "Classical case ":

Cheers !