Which of the following factors can contribute to mental accounting bias?

Mental accounting bias occurs when individuals categorize and treat their money distinctly depending on its source or intended use, rather than viewing it as a single pool of resources. This practice often leads to suboptimal financial decisions because individuals allocate their money in a way that doesn’t reflect proper risk assessment or overall wealth management.

The correct choice focuses on how individuals separate gains and losses into different mental accounts. This behavior can lead to irrational choices, such as holding onto losing investments longer than necessary because they are in a "loss" category while treating gains as separate and more valuable. By segregating their financial experiences, individuals may fail to consider the bigger picture of their overall financial situation, which can prevent them from making sound investment decisions.

In contrast, focusing equally on all assets regardless of their source would encourage a more rational assessment of total wealth rather than reinforcing the biases of mental accounting. Investment strategies that emphasize overall market performance could lead to more informed decision-making by considering market conditions rather than segregating assets into individual mental accounts. Providing detailed risk assessments for all assets aids in understanding total risk exposure, further mitigating the effect of mental accounting by promoting a holistic view of an individual’s portfolio. Therefore, the distinction of gains and losses across different accounts is a core aspect of mental accounting