Home › What the research says

Labeling Money: The Evidence That Earmarking Changes Spending

The assumption being tested

Fungibility, the idea that any unit of money substitutes for any other, is a central assumption in consumer choice theory. It implies that the composition of income or wealth is irrelevant to consumption. If that holds, calling one part of your paycheck the "groceries" money should have no behavioral consequence at all. Testing that cleanly requires a controlled setting where labels are the only thing that varies.

The experimental result

Johannes Abeler and Felix Marklein published "Fungibility, Labels, and Consumption" in the Journal of the European Economic Association in 2017. They report that even in a simple, incentivized setup, many subjects do not treat money as fungible: when a label is attached to a part of their budget, subjects change consumption according to the label. The authors present this as support for behavioral models of narrow bracketing and mental accounting.

Who violates fungibility more

Abeler and Marklein also report that in the lab, subjects with lower cognitive abilities were more likely to violate fungibility. This is an important nuance and cuts both ways. It suggests labeling effects are partly a product of limited processing rather than a deliberate strategy, which complicates the cheerful reading that labeling is simply a smart tool everyone should adopt.

Earmarking as a savings intervention

Dilip Soman and Amar Cheema studied earmarking as a deliberate intervention among low-income households, reporting results in the Journal of Marketing Research in 2011. They found that people save more when earmarked money is partitioned into two accounts than when it is pooled into one, and that adding a visual reminder of the savings goal increased the savings rate. The important structural point is that earmarking there was not merely a mental label; it was implemented physically, with money placed in sealed envelopes.

The honest boundary

Labeling effects are documented in controlled experiments and in specific field interventions. That is not the same as evidence that any labeling scheme, in any app or spreadsheet, will reduce your spending. Thaler's own framing in the Journal of Economic Perspectives treats fungibility violations as a double-edged property of human accounting: they can support self-control, and they can also produce choices people would reject on reflection.

Sources

Every source below was retrieved and checked. Findings are reported as the source states them.

• Fungibility, Labels, and Consumption — Journal of the European Economic Association, 2017
  In a simple incentivized setup, many subjects did not treat money as fungible: when a label was attached to part of their budget they changed consumption according to the label, and subjects with lower cognitive abilities were more likely to violate fungibility.
• Earmarking and Partitioning: Increasing Saving by Low-Income Households — Journal of Marketing Research, 2011
  People saved more when earmarked money was partitioned into two accounts rather than pooled into one, and the presence of a visual reminder of the savings goal increased the savings rate.
• Anomalies: Saving, Fungibility, and Mental Accounts — Journal of Economic Perspectives, 1990
  Argues that violations of fungibility, together with self-control, strongly influence saving behavior, treating non-fungibility as consequential rather than as noise.

Common questions

Does labeling money actually change behavior, or do people just say it does?

Abeler and Marklein used an incentivized experimental setup, meaning participants faced real consequences rather than answering hypothetically, and still found consumption shifting with labels. That is stronger evidence than a survey, though it remains a lab result.

Do digital labels work as well as physical envelopes?

The cited studies do not answer this. Soman and Cheema's field intervention used physical envelopes; Abeler and Marklein used a lab budget. No study cited here compared a digital budgeting category against a physical envelope.

Can labeling backfire?

It can, in principle. Because labeling works by breaking fungibility, it can also lock money into a category where it is less useful, or justify spending that would not otherwise happen. Related research on flexible expense categorization documents that people can reclassify expenses to fit a label when the boundary is ambiguous.

Related