Why Small Change Makes You Spend More
Psych 🧠 - 356/500
Hello Reader,
Today, we are talking about the (real) psychology of money. But before we begin,
What is it?
This research paper investigates the psychological impact of holding different forms of cash – specifically coins versus banknotes – and how this influences spending.
It introduces the concept of "pain of holding," arguing that the physical characteristics of coins (bulk, weight, cumbersomeness) make them more annoying to hold than banknotes, leading to a desire to spend them faster.
Major findings:
Coins are a greater pain to hold: In both a field study in India and a controlled experiment in the US, participants consistently reported experiencing a higher "pain of holding" for coins compared to equivalently valued banknotes.
Pain of holding drives spending: Participants given primarily coins spent a larger portion of their earnings than those given primarily banknotes, regardless of the currency (Indian Rupees or US Dollars). This was observed in purchases of consumer goods (study 1), conversion to gift cards (study 2), and donations (study 3).
Perceived purchasing power not a significant factor: The researchers controlled for the possibility that people might spend coins more because they perceive them as having lower purchasing power than banknotes. This was not empirically supported, suggesting that pain of holding is the primary driver.
Effect generalizes across SES levels: The relationship between pain of holding and spending was consistent for participants with different socioeconomic backgrounds.
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What do I need to know:
Physical characteristics of money matter: The form in which we carry cash can influence our spending behavior, even when the monetary value is the same.
Pain of holding leads to under-saving: The desire to get rid of annoying coins might lead people to spend more impulsively and save less.
Implications for vulnerable populations: This effect could be particularly problematic for individuals who primarily rely on cash and are more vulnerable to financial hardship.
Source:
https://myscp.onlinelibrary.wiley.com/doi/full/10.1002/jcpy.1395?campaign=woletoc