§ 01
| Mental Account | Irrational Behavior | Reality |
|---|---|---|
| ‘House money’ | Take more risk with profits than with original capital | All dollars have equal value regardless of source |
| ‘Fun money’ account | Gamble with a small speculative account | Losses in the fun account reduce your total wealth just as much |
| Tax refund | Treat as ‘bonus money’ and spend more freely | It was always your money — the government was borrowing it interest-free |
| Dividend income | Spend dividends but refuse to sell shares for income | A $1 dividend and a $1 share sale produce identical economic outcomes |
§ 02
The ‘house money effect’ is particularly dangerous: after a winning streak, investors take outsized risks because they’re playing with ‘profits.’ But profits are real money. Losing $50K of profits is exactly as costly as losing $50K of original capital.
§ 03
Do you treat dividend income differently from capital gains? Do you have a ‘speculative’ account and a ‘safe’ account? These are mental accounting buckets that may be distorting your overall risk management.
§ 04
After a 50% gain on a stock, you decide to ‘let profits ride’ and set no stop-loss because ‘it’s house money.’ Is this rational?
§ 05
Five questions · AI feedback
Sit with the ideas.
An investor keeps $400K in a 'safe retirement' bond portfolio at 4% and $100K in a 'speculative' stock account. They take a $30K loss in the speculative account but refuse to rebalance from bonds because 'that money is for retirement.' What's the core mistake?
Why: