Mental Accounting Bias of Dividend Investing Explained
Mental accounting bias. Mental accounting refers to applying different subjective values to the same amount of money. Humans tend to organize and classify finances in different groups based on their origin or intended purpose. I see mental accounting bias often when talking to dividend investors. The irrational preference for dividend stocks for the sake of the dividend per se, is a mental accounting fallacy. Dividend investors, even if they realize dividends aren't free money, tend to view the dividend payment as separate income. We know that the share price compensates for the dividend payment, and that selling shares of an equivalent value is the same, and should actually be mathematically preferable over the long term. I suspect mental accounting is also responsible for dividend investors' fascination with covered call income funds like QYLD. For another example specific to investing, I see mental accounting all the time with investors creating multiple portfolios, a safe one and a risky one for growth and viewing them separately. This doesn't make much sense.
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