How To Spend It
The world of behavioural economics never ceases to amaze and inspire us. We recently discovered another instance where the emotional trumps the rational and people’s behaviour contradicts common sense. A host of recent psychological studies revealed that the method of payment often has considerable implications on how we spend. A joint research paper by MIT and Carnegie Mellon University examines the concept of coupling – or the how much the consumption experience and the payment for that experience are linked together in a person’s mind. They discovered that paying by cash tends to have a much more tangible impact on the consumption experience, than, say clicking a “Download” button on iTunes or even a credit card. In a similar study a trial group of MBA students (i.e. highly financially literate) bid nearly twice as much for an item of unknown value when they paid with credit card, compared to when paying by cash.
The learning? Money abstractions such as credit/debit cards, poker chips, and contactless devices tend to supress people’s frugality and the result is higher average spend. What this means for credit card and payment intermediaries is that they can justify the transaction fees with greater confidence. While we don’t condone irresponsible spending in any form, we believe that this is an important learning at a time when cash is less and less part of our daily lives. Follow the references below at your peril.
Drazen Prelec and George Lowenstein - The Red & Black: Mental Accounting of Savings and Debt
Drazen Prelec and Duncan Simester - A Further Investigation of The Credit Card Effect on The Willngnes To Pay
Kunston, Rick, Wimmer, Prelec, Loewenstein - Neural Predictors of Purchases