The Illusion of Fungibility: Mental Accounting, the "House Money" Effect, and Asymmetric Risk Profiles in Modern Decision-Making

A foundational axiom of neoclassical economic theory is the principle of fungibility: the proposition that money is completely homogeneous, interchangeable, and indifferent to its origin or intended category. This paper investigates the systematic violation of fungibility through the lens of Richard Thaler’s Mental Accounting framework and the "House Money" effect. We analyze how economic agents segregate wealth into discrete cognitive compartments, applying distinct subjective budgeting rules based on whether capital is earned through labor, acquired via windfall gains, or accumulated as paper profits. Through an examination of hedonic editing rules, dynamic risk preferences under prior gains (Thaler & Johnson, 1990), and digital payment decoupling mechanisms (Prelec & Simester, 2001), we demonstrate that prior windfalls systematically inflate risk tolerance, inducing excessive speculative exposure. Furthermore, we examine how mental accounting manifests in macroeconomic fiscal policy (tax rebates vs. stimulus framing) and retail market volatility. Finally, we propose structural choice architecture interventions—including automated cognitive budgeting buffers and digital friction re-integration—to counteract mental compartmentalization and restore rational capital allocation.