Financial encyclopedia

Every Lunar New Year, many people receive an extra income - red envelopes. However, compared to monthly salaries, people tend to be more casual when using red envelopes and are more likely to spend them. On the contrary, if the expenditure comes from the salary, even if the amount is the same, people will be more cautious when making decisions. Why does the way money is used vary depending on its source, even if it is the same amount? 

The brain creates different categories for funds. 

In behavioral finance, there is an important concept known as mental accounting. People tend to view income from different sources as funds of different natures and manage them separately. For example:
- Salary → Daily expenses
- Investment income → Reward-based consumption
- Year-end bonus → Travel or large expenditures
- Red envelopes → Extra income 

However, from a financial perspective, the value of each unit of money is actually the same. The difference lies in that the brain assigns different uses to it based on its source. 

II. The Impact of Mental Accounting on Investment Decisions 

- Be willing to take on higher risks with bonus funds.
- Tend to increase position size when reinvesting investment profits.
- Have a relatively lenient stop-loss standard for non-principal funds. 

The reason is that investors often consider this portion of funds "not the original investment". When risk tolerance is based on the classification of funds rather than the overall asset situation, the risk level may be underestimated. 

III. How to Reduce the Impact of Mental Accounting? 

All income, including salaries, red envelopes, bonuses and investment returns, should be integrated into the overall capital allocation. Then, they should be allocated to different uses according to the predetermined proportion, rather than determining the degree of risk they can bear based on the source of funds. 

The difference between bonuses and salaries does not stem from the money itself, but from the psychological categorization that the brain makes for different sources of income. However, the market does not distinguish between sources of funds. Every risk taken comes from the same overall asset base. Therefore, establishing a consistent approach to fund management is more important than differentiating between sources of funds.