Traders keep invisible ledgers: this is my trading money, this is house money, this is the profit from the good trade, this is the loss I still need to win back. The buckets change behaviour even though the balance does not care.
The clearest damage is inconsistent risk. Money labelled as profit gets risked at three times the normal size, while money labelled as capital is treated as untouchable. The result is that your largest bets happen in the part of the cycle where your judgement is loosest.
One account, one risk rule, one measure of equity. If your risk-per-trade is one percent, it is one percent of current equity on every trade regardless of where that equity came from.
Related: house-money-effect, break-even-effect, risk-per-trade