New research explains how people use novel mental accounting techniques to live with ill-gotten gains

In Brief: Money should be a fungible good, i.e., money gained from different sources should be indistinguishable to the gainer, says classical economic theory. However, new research suggests that money gained unethically is treated negatively in the minds of the gainers. To alleviate this problem, both companies and people can mentally launder the money in different ways, say by pooling it with ethically gained funds. Mental money laundering makes accepting ill-gotten gains easier. Indeed, this phenomenon is common across many sectors, and new technologies are making it easier to accomplish.

Analysis: In economics, fungibility is the ability of a good or asset to be readily interchanged for another of like kind. Most people would assume that money is fungible, because it would seem odd to imagine differences in character in two identical dollar bills. This belief is generally true, but there are exceptions. For example, researchers have shown that people think differently about money gained through unethical activities. Specifically, people are more willing to give a more significant portion of ill-gotten sums to charity than they would regular, ethically earned income.

New research from Chicago Booth’s Alex Imas, Carnegie Mellon’s George Loewenstein, and Carey K. Morewedge of Boston University builds on previous findings about the mental classification of money to introduce the concept of mental money laundering. This psychological phenomenon occurs when an entity (person or company) passes unethically gained money through an ethical process and thus “mentally cleanses” it. For example, say you embezzled $1M from your employer. Mentally, you would have a negative connection between that money and its source. You might decide that you would feel better if you donated $250K to charity. This need to donate, say the researchers, could be avoided if you invested the $1M in a stock that appreciated in value. The gains from the price raise would “cleanse” the original ill-gotten gains, making the entire sum easier to accept.

As the authors note:

People spend money earned from ethical and unethical sources in different ways. Windfall gains received from questionable sources (e.g., tobacco companies) are more likely to be spent on utilitarian goods such as school supplies than on hedonic goods like ice cream. Money earned through deception or thievery is more likely to be spent on charitable giving than the equivalent amount earned through honest means—at least by those who are not naturally inclined toward these activities.

Interestingly, the negative association with the money is, in the researchers’ opinion, not guilt per se but a general association. In other words, ill-gotten money does not make anyone act more ethically — it just makes someone uneasy about the money itself. As the paper notes, “compensatory behavior is not driven by a general motive to assuage guilt but is specific to the money itself.” Rather, “it appears to be driven by negative associations between the money and its source.”

In response to this negative association, people often engage in mental accounting “by taking advantage of the opportunity to obfuscate the source of unethical gains so they can spend the money unencumbered by moral constraints.” Indeed, if people can find a way to re-label the money so that it loses its negative association, the money is suddenly treated as if it had been gained ethically.

The authors reached their conclusions after a series of experiments in which participants were given ways to mix unethically gained money (say sums gained by lying) with money earned ethically. The experiments demonstrated a consistent result. When “dirty” money was mixed with clean, participants tended to treat the entire pool of money as though it were ethically earned. Furthermore, once participants mentally cleansed money, they were naturally more willing to accept money from unethical sources, knowing that it would be mentally cleansed later.

The wider research on this phenomenon has exposed other associated behaviors. Indeed, summarizing a wide range of related research, the authors also note that:

People avoid obtaining information that might compel them, out of a sense of ethicality, to sacrifice self-interest. They hire others to take selfish actions on their behalf that they would not take on their own behalf so that they feel less responsible for the resulting outcomes than they would if they had taken the actions themselves. Moreover, third parties hold selfish agents less responsible if they employ intermediaries to act selfishly on agent’s behalf as well.

The implications of this new research become apparent when we consider people who work in morally questionable roles, say those that sell unsafe drugs, exploit old people or pollute the environment. “How can they do that every day?” observers may ask. This research suggests an answer: by mentally cleaning the money made from these activities, these agents can enjoy the proceeds without significant reservations. At a company level, a firm that makes money from ethically questionable activities can mentally launder that money through social impact programs or donations to charity. As the authors note, this kind of cleansing by people and companies is common:

Most people and organizations that are engaged in morally questionable activities are also engaged in legal, ethical ventures. Tax cheats with unreported income typically also earn legitimate income that they duly report. Firms that earn money through dubious means also earn money in legitimate ways. Professors who engage in questionable consulting activities, such as serving as an expert witness for corporations in lawsuits against the public, also earn salaries from their normal academic work.

Indeed, mental money laundering is made easier every day:

New technologies that blur the line between mental accounting and “real” accounting, such as payment rails and budgeting software (e.g., Venmo and Mint, respectively), offer novel opportunities for creatively pooling resources. Helping consumers create virtual accounts that mirror mental accounts can certainly have benefits, such as enhancing saving and making spending more efficient…Our findings suggest that it may also provide a tool aiding mental money laundering and encouraging behaviors with social costs. Consumers may eliminate undesirable source effects simply by depositing unethical earnings into an account containing money that was ethically earned. 

In sum, the paper lays out a convincing case for its novel analysis of how people mix bad money with good. It will be interesting to see if new technologies increase this phenomenon and the effects of that increased ethical blurring in future research.

The Research:

Imas, Alex and Loewenstein, George F. and Morewedge, Carey, Mental Money Laundering: A Motivated Violation of Fungibility. Available at SSRN: or

Posted by:Carlos Alvarenga