Definition
Capital is segmented into arbitrary buckets that distort risk sizing and evaluation.
Example
A trader takes outsized risk with "bonus capital" but manages the core portfolio conservatively. The decision framework changes based on the label assigned to the capital rather than the underlying expected value or portfolio risk constraints.
Cognitive Driver
The mind organises financial outcomes into mental buckets--core, discretionary, house money, performance fees. These categories shape risk tolerance and decision-making even when they have no economic relevance. The label becomes a hidden rule governing behaviour.
Market Expression
Risk-taking varies across accounts or capital pools despite identical objectives. Profits are treated as expendable ("house money effect"). Losses in one bucket feel more painful than losses in another. Portfolio construction fragments into inconsistent risk frameworks.
Trigger Conditions
- Segmented portfolios or multiple accounts
- Performance-linked compensation
- Periods following large gains or windfalls
- Distinct capital sources (salary vs bonus vs realised profits)
- Situations invoking emotional attachment to specific capital pools
Diagnostic Markers
- Different sizing logic applied to separate "buckets"
- Higher risk-taking with recent profits than with base capital
- Rationale changes depending on which account the trade is logged to
- Inconsistent stop placement across categories
- References to "this is bonus money" or "this one doesn't matter as much"
Cost Profile
- Incoherent portfolio-risk profile
- Overexposure to low-quality trades funded by perceived "free money"
- Underutilisation of high-quality ideas due to overly conservative core capital rules
- Distorted position-sizing logic
- Volatility spikes from unbalanced risk-taking across buckets
Differentiation From Adjacent Biases
- Not loss aversion: mental accounting is categorisation; loss aversion is pain sensitivity.
- Not sunk-cost fallacy: mental accounting is about labels; sunk-costs are about past effort.
- Not disposition effect: mental accounting changes behaviour by bucket, not by P&L path.
Corrective Lens
Unify decision-making under a single capital framework. Treat all funds as interchangeable and evaluate trades solely on expected value, risk contribution, and portfolio fit. Use review prompts that explicitly ask whether behaviour would change if the capital bucket were removed.