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Relational accounting refers to the ways in which social relations generate practices of recording, categorizing, and evaluating financial activities and how these practices influence the financial choices of individuals. An understanding of these practices matters for social scientists because they have been shown to lead individuals to violate some of the central tenets of classic economic theory—namely, consistency of preferences, utility maximization, and the fungibility of money.
For example, take the oft-cited case of Christmas savings clubs. The economist Richard Thaler (1999) describes how they work:
In November (usually Thanksgiving) a customer opens an account at her local bank and commits herself to depositing a given amount each week for the next year. Funds cannot be withdrawn until a year later, when the total amount is redeemed, just in time for the Christmas shopping season. The usual interest rate on these accounts is close to zero.
This case is interesting because, according to standard economic theory, Christmas savings clubs should be unpopular with consumers. The accounts are not liquid, which means that an account holder cannot withdraw funds during the prespecified period of time; they have a rather low rate of return (if any); and they have high transaction costs (since they require weekly deposits). In this way, the costs of this arrangement exceed its financial benefit, which violates the assumption of utility maximization. Yet for much of the early 20th century, Christmas savings clubs were incredibly popular in the United States, with billions being invested every year across the country. (Thaler suggests that a modern-day example of this practice is tax withholdings— which he refers to as the “Easter” account.) So, given that standard economic theory falls short, what explains the popularity of this practice? There are competing arguments.
On the one hand, Thaler contends that the popularity of the savings clubs was the result of a need to implement institutionalized devices for self-control. According to Thaler, the lack of liquidity was precisely the point. The account functioned as a means to protect oneself from one’s own impulses to spend rather than save and to use the funds for purposes other than what they were intended. As a result, he argues, the costs associated with the savings accounts were a small price to pay in return for the assurance of having enough money for presents at Christmas.
On the other hand, the sociologist Viviana Zelizer argues that their popularity was the result of a need to negotiate household relations.
That is, while Zelizer also contends that the lack of liquidity was the appeal of the savings clubs, she argues that they were not primarily used to protect an individual from oneself. Instead, she notes, most users of the Christmas savings clubs were workingclass wives, who relied on those clubs as a valuable institutional device to safeguard holiday monies from other household members (especially their husbands). Without this device, she argues, these women would have to endure the humiliating practice of begging their husbands for “gift money.” Thus, she contends that participation in these savings clubs can be better understood as “relational work” done by working-class wives and as an outcome of their relationships with husbands, children, and other family members—who would otherwise argue about which monies are to be spent, by whom, for whom, when, and for what purpose.
Mental Accounting And Relational Accounting
Beyond the case of Christmas saving clubs, both economists and sociologists have documented other ways in which people categorize their money that cannot be explained by standard economic theory. For example, people often categorize their money based on its source. That is, individuals differentiate earned money (i.e., a paycheck) from unearned money (i.e., windfall gains), or clean money from dirty money (i.e., money from illegal or illegitimate sources). Moreover, people often categorize their money based on its intended use. That is, individuals differentiate rent money from holiday money, or remittance money from petty cash.
Importantly, these categorization practices have been shown to affect how individuals account for their money, which leads to seemingly bizarre behaviors where dollars equal in monetary value are treated unequally in practice. That is, because the origins and intended use of money matter, individuals often treat cash as nonfungible and noninterchangeable. As a result, household budgets are bundles of categories rather than fluid assessments of expenditures and incomes. Understood in this way, it is not hard to imagine someone’s resistance to dipping into the remittance category, for instance, when daily expenditure accounts are approaching their limit.
Like their differing explanations for the popularity of the Christmas savings clubs, Thaler and Zelizer’s explanations for these practices of categorization also differ. While the former sees them as an example of individuals adopting internal systems of self-control (which he calls “mental accounts”), the latter argues that these practices are examples of relationship management strategies (or “relational accounts”). That is, while the former contends that categorization emerges from one’s need to protect oneself, the latter argues that it emerges from a need to negotiate relationships, which is governed by the shared meanings we hold within those relationships.
These different explanations are the result of their different approaches to understanding economic action. Thaler is a proponent of behavioral economics, which is an approach that focuses on the way people think and the heuristics that individuals use in their decision-making processes. Zelizer, by contrast, is a proponent of relational sociology, which is an approach that focuses on the social relations that an individual has, the meanings associated with those relations, and the matching of those particular relations with the appropriate type of economic transaction and media (what she refers to as “relational packages”).
Relational sociologists contend that, although an understanding of “mental accounting” clarifies some crucial features of categorization, identifying individual mechanisms explains only select features of the process. This is because mental accounting explanations do not address the role that social relations might play in generating the practices of recording, categorizing, and evaluating financial activities. As the sociologist Frederick Wherry contends, the relational accounting approach calls attention to the fact that individuals do not make financial decisions in a vacuum but rather orient those decisions toward a web of social relationships and a set of cultural practices they value as ends in themselves. Thus, he argues, relational accounting unveils a different, and perhaps larger, set of mechanisms producing those outcomes—as we saw in the case of Christmas savings clubs.
The Components Of Relational Accounting
In his work, Wherry identifies the four primary components of relational accounting:
- The relational site: the specific place where the transaction is interpreted and enacted, as well as the tools and devices arranged therein
- Relationship management: the dynamic matching of transaction media (e.g., money, gifts, and credits) with different types of social relationships
- Patterned temporal expectations: those that normalize (or make uncommon) the timing of differently defined receipts and payments
- Third-party sanctions: the enforcement of relational understandings by third parties
The Relational Site. The concept of the relational site allows analysts to consider how the shared meanings regarding the site of transaction may affect the ways in which individuals interpret a given transaction and influence their financial decisions. For example, take the practice of tipping. In the United States, on receiving a haircut, it is customary to tip your hair dresser 15 to 20 percent of the total bill, whether you are a regular or not. In England, by contrast, it is appropriate to give the hairdresser a Christmas bonus at the end of the year. In this way, we see that while the object of consumption does not change, the shared understandings of a site shape the transaction.
Relationship Management. Following from the categorization process detailed above, the concept of relationship management allows for analysts to consider the ways in which social relations generate meaningful distinctions among monies. For example, the scholars Soman and Cheema conducted a social experiment promoting savings with low-income laborers in rural India. They dispensed “savings envelopes” to two randomly assigned groups. In one group, the envelopes contained a picture of the worker’s family, and in the other group there was no picture. They found that the group of laborers who had a picture in their envelope saved more than their counterparts in the other group, who had no family picture.
Patterned Temporal Expectations. Described by the sociologist Robert Merton, the concept of patterned temporal expectations allows for analysts to understand how social relations may affect the balancing of accounts. Emerging from small groups (where there is frequent interaction and intimate sociability), patterned temporal expectations create obligations for individuals to honor the meanings of significant life course events—that is graduations, marriages, funerals—as well as the relationships entangled in those meanings. However, as Wherry contends, when those patterned temporal expectations are misaligned with institutionally prescribed accounts (i.e., bank loans), the accounting of individuals may yield disadvantageous results.
Third-Party Enforcement. The concept of third-party enforcement allows for analysts to understand how parties who are not directly related to the financial transaction may evaluate a given transaction and impose sanctions for unwanted behavior. Third parties may be either informal (i.e., friends, kin, and local charismatic authorities) or formal (i.e., debt collectors, nonprofit or credit counselors, organizational agents from banks), and their relevance depends on the type of transaction and the transacting parties involved. Take the commercial sex work industry, for example. As Zelizer points out, the cause for its illegality in the United States is the belief that economic activity and intimate relations constitute separate and hostile spheres. In this way, she contends, the American courts engage in relational work, or the matching of intimate relations with appropriate economic transactions and media.
An understanding of how individuals record, categorize, and evaluate financial activities matters for social scientists because these practices have been shown to influence the financial choices of individuals. Moreover, an understanding of how social relations generate these practices matters because they offer a wider and more comprehensive set of explanations for economic action than both classical economics and behavioral economics models. The examples offered above show how relational accounting provides an insight into a different set of mechanisms than the mental accounting approach. And the four components outlined above allow analysts to identify those mechanisms.
- Thaler, Richard “Mental Accounting Matters.” Journal of Behavioral Decision Making, v.12/3 (1999).
- Wherry, Frederick F. 2015. “Relational Accounting.” Center for Cultural Sociology Working Paper Series. New Haven, CT: Yale University.
- Zelizer, Viviana A. 2012. “How I Became a Relational Economic Sociologist and What Does That Mean?” Politics & Society, v.40/2 (2012).