How the Brain Budgets - Researchers Map Spending Categories and Explain Consumers' Puzzling Decisions

Inflation and rising prices in recent years have pushed consumers to look for ways to save money — yet these strategies are not always rational. Researchers from Chicago Booth, Daniel Bartels and Lin Fei, studied a phenomenon that explains the paradoxical financial decisions of millions of people. It is known as mental accounting — the tendency to mentally divide money into categories and offset overspending not where it would be most advantageous, but within "nearby" spending categories.

After long months of pandemic isolation, Bartels decided to take his family to a familiar burger-and-fries café. Expecting a bill of around $50–60, he received a check for $90 including tip. Federal statistics confirm that prices at full-service restaurants rose roughly 8% in a year, while fast-food chains like McDonald's saw increases of nearly 7%.

"It felt like too much for burgers and fries," Bartels recalls. His immediate reaction was to cancel the usual Friday dinner delivery and cook at home instead. He could have offset the overspend by cutting back on gifts, clothing, or any other purchases — but his brain instantly built a savings plan squarely within the "dining out" category.

Bartels and Fei set out to understand exactly how the brain decides where to "recoup" unplanned spending. Their research shows that people maintain stable mental links between types of expenditure, and a savings plan almost automatically attaches itself to the category in which the overspend occurred.

The economic principle of fungibility holds that money is money regardless of its source or purpose. If you overpay $30 for dinner, you can perfectly well make it up by buying cheaper orange juice or spending less on gas. Psychologically, however, people "label" sums of money and keep internal accounts by category. This helps them navigate everyday spending, but can lead to irrational decisions.

Back in 1985, Nobel laureate Richard Thaler described how two couples, having received $300 in compensation for fish lost by an airline, spent $225 on the most expensive dinner of their lives. The money landed simultaneously in the "windfall income" account and the "food" account, which determined how it was spent. Subsequent experiments confirmed the scale of the phenomenon.

• Gift cards tied to a specific retailer — such as Levi's or Whole Foods — create a "store-specific" spending goal and nudge buyers toward that store's most typical products, whereas general-purpose cards produce a broader spending mindset.

• During the Great Recession, consumers switched to cheaper, lower-octane gasoline when prices rose, but the savings "stayed where they happened" and did not carry over to other categories such as milk or juice.

• Categorical thinking can generate cognitive traps, including the sunk cost fallacy, where a person keeps investing in a losing asset simply because they have already "committed" to it.

Gifted money feels freer than earned money. Upon receiving an unexpected sum, people often mentally permit themselves a purchase they had long postponed. Yet not every sum labeled as a gift is equivalent to cash. A gift card, for example, restricts choice to a particular store, while bonus funds in online services may carry additional conditions. This is especially visible in online gambling: even no deposit bonuses at nodepositau.com, which require no account top-up to claim, frequently come with wagering requirements, withdrawal limits on winnings, and expiration dates. A person may mentally file such a bonus under "extra money," even though it cannot be used as freely as regular funds. This is precisely how mental accounting sometimes leads us to value money not by its actual availability, but by the label we have attached to it.

Financial advisors often speak of spending buckets, but Bartels and Fei found that mental accounting is more accurately described by the metaphor of a branching tree. Some expenditures are psychologically "growing on neighboring branches," while others are far apart. Overspending on breakfast cereal, for instance, is more likely to trigger savings on eggs and bagels than on dinner.

A series of experiments involved hundreds of U.S. residents recruited through MTurk and Prolific (sample sizes ranging from several dozen to 300+ participants). Participants were given a set of 64 cards listing types of expenditure and asked to group them "however seems logical." From these groupings, a distance score from 0 to 4 was calculated, where 0 indicates an identical item and 4 indicates items that almost no one grouped together. Bread and a burger received a distance of 1; bread and car maintenance received a 4. A repeat card sorting exercise conducted several months later revealed a stable consensus.

In the second and third experiments, participants were presented with a "focal" item and asked to choose where to apply a discount or which item to take for free.

• When choosing a discount, 43% of participants preferred a "nearby" item, while only 31% chose a "distant" one. Given a discount on sunglasses, people more often applied it to a backpack than to a restaurant gift card.

• When the choice involved a free item, the effect strengthened: 46% selected the "nearest" option versus 28% for the "distant" one.

• A field analysis of NielsenIQ panel data covering more than 7 million shopping trips from 2009 to 2018 confirmed the laboratory findings. A discount on laundry detergent more often led to increased spending on toilet paper and diapers than on coffee or pet food.

The distances are not always intuitive. A restaurant gift card and pet food are both related to food, yet participants placed the gift card closer to streaming services and bars. Moreover, the same item can belong to multiple branches: groceries turned out to be close both to household goods like microwaves and to obligatory expenses like rent.

Understanding mental links opens up several avenues for companies.

• Online and brick-and-mortar stores can place "psychologically adjacent" products near each other to simplify navigation. If shoppers mentally group laundry detergent with diapers, placing them on neighboring shelves makes logical sense.

• Cross-promotions and bundles become more precise when marketers look beyond obvious pairings (toothpaste and a toothbrush) to hidden adjacencies — for example, a gym membership and a storage unit rental.

• The card sorting method allows brands to assess which product line extensions will feel "natural," and to tailor marketing messages depending on the target branch of the tree.

The practical value of this research extends well beyond marketing. Breaking large budget lines into subcategories — for instance, "delivery," "cafés," and "groceries" instead of a single "food" line — helps track where money actually goes and makes it easier to consciously shift savings between branches. Financial apps and advisors that align categories with a person's natural mental structure can reduce overspending and the likelihood of debt. In a period of high inflation and economic uncertainty, understanding how the brain keeps its own books becomes a real tool — both for businesses and for anyone who wants to spend more deliberately.