Why You Are More Likely to Hang Onto a $100 Bill Than Five $20s

Picture this: you’re going to the workplace and also you cease at your common espresso store on the best way. You decide up your common giant mocha and also you eye the ham and cheese paninis hungrily. Breakfast didn’t fill you up as a lot because it often does, and also you’re feeling peckish. You look in your pockets and see that you’ve two $5 payments. You purchase the espresso and the sandwich. Now image this: similar state of affairs, however whenever you look in your pockets you see a $5 invoice and a $50 invoice. Chances are, this time you’ll skip the panini. Why? Because of the denomination impact.

What is the denomination impact?

The denomination impact describes our larger willingness to spend cash if we use smaller denominations; despite the fact that a $100 notice has the identical worth as ten $10 notes, we’re more likely to spend the $10 notes earlier than we even consider touching the $100.

The seminal research

The time period “denomination effect” was coined by advertising and marketing professors Priya Raghubir and Joydeep Srivastava of their 2009 analysis paper^[1] on spending habits. In their first experiment, undergraduate college students from two American universities got a small sum of money — ostensibly as a thanks for collaborating in an experimental session — and instructed that they may both maintain the cash or spend it on sweet. One set of scholars was given 4 25¢ cash and one other was given a $1 invoice. Sixty-three p.c of the members with the 4 quarters determined to buy sweet, whereas solely 26 p.c of these given the $1 invoice spent any cash. The researchers concluded that individuals are extra inclined to spend smaller-denomination cash.

Research reveals that individuals are quicker to spend smaller-denomination cash.

They subsequent surveyed prospects at a fuel station to see if the denomination impact held up in real-life conditions. Seventy-five prospects have been requested to reply a brief questionnaire on fuel utilization and have been then given both a $5 invoice or 5 $1 payments as a thanks for his or her time. The prospects then went into the shop to pay for his or her fuel and, after they got here out, the researchers requested them for his or her receipts. They discovered that just one in 6 of the individuals who had been given a $5 invoice determined to spend it, in comparison with about 1 in Four of these given the $1 notes.

Wanting to see whether or not the impact was specific to American tradition, the researchers took their research to China. One hundred and fifty housewives got an envelope of cash in change for finishing a survey. The envelope contained both a single Renminbi (CNY) 100-yuan banknote (equal to roughly $14.63 USD, and fairly a considerable sum of money for these ladies) or 5 banknotes including as much as an equal worth. The ladies have been instructed that they may maintain the cash or buy some family merchandise. Compared to the ladies given the only 100-yuan notice, twice as lots of the ladies given the smaller banknotes determined to purchase one thing. Of the ladies who did purchase merchandise, those that had damaged into their giant banknote have been much less glad with their purchases than those that had used smaller denominations. Apparently, the bigger banknotes have been extra painful to spend.

Once somebody decides to interrupt the next denomination banknote, they usually spend greater than somebody utilizing smaller denominations and they’re much less glad with their purchases.

Interestingly, the outcomes of two of their three research additionally confirmed that, as soon as the choice to spend had been made, the individuals who had determined to interrupt their greater denomination banknote spent greater than those that had determined to spend smaller denomination cash. The researchers put this all the way down to the “what the hell” impact,^[2] which is what occurs after we promise ourselves that we’re going to present self-control in a sure scenario — like consuming throughout an evening out with mates, or shopping for throughout a sale at our favourite retailer — however we break that promise after which discover ourselves doing much more of no matter it was we have been attempting to do much less of.

How it really works

Several theories have been proposed to account for the denomination impact. One of the primary was a “bias for the whole,” put ahead in 2006 by advertising and marketing professors Arul Mishra, Himanshu Mishra, and Dhananjay Nayakankuppam. Their research^[3] revealed that bigger denominations of cash (a $100 invoice or a $50 invoice) have been related to decrease spending intentions than an equal sum of money in smaller denominations (ten $10 payments or ten $5 payments). The professors argued that we are likely to understand greater worth when cash is within the kind of a big, single denomination due to the larger fluency we expertise after we course of the big denomination relative to many small denominations. This larger fluency makes us really feel good and we switch that feeling to the cash itself, making us overvalue “the whole” and fewer more likely to spend it in comparison with an equal sum of money in smaller notes.

Many folks use bigger payments to partition their cash to assist them management their spending.

Raghubir and Srivastava disagree. They suppose that enormous denominations are psychologically much less fungible than smaller ones and that this notion leads folks to consider that they’re much less simply spent, making giant banknotes enticing to those that need to exert self-control in spending. Assistant professor of promoting, Helen Colby, additionally thinks that thrifty folks use giant banknotes to save lots of, however she thinks that this works because of partitioning. Inspired by analysis^[4] that reveals that partitioning money into envelopes reduces consumption and will increase financial savings, she designed and carried out a research that confirmed that enormous payments are virtually nearly as good as envelopes relating to serving to us maintain observe of our cash and restrict our spending.^[5]

Another principle was put ahead in a 2012 Time journal article by Thomas Gilovich and Gary Belsky, who suppose that the denomination impact may need one thing to do with the idea of psychological accounting — the separate psychological accounts that we maintain for various expense classes, reminiscent of lease, meals, and leisure, in order that we will arrange and maintain observe of our monetary actions. They counsel that we assign small denomination banknotes to a psychological “petty cash” account to be spent on trivial gadgets, whereas bigger banknotes are regarded as “real money” to be spent on issues of nice significance or saved for a wet day.^[6]

Two ultimate notable ideas put ahead to elucidate the denomination impact are 1) that we’re reluctant to interrupt giant payments as a result of doing so would generate smaller denominations in change which might be more durable to observe and maintain observe of^[7] and a pair of) that we desire clear payments to unclean payments which were contaminated by others and “take pride in owning bills that can be spent around others.”^[8] Since small denominations are used extra usually and are usually extra dirty than giant denominations, we desire to save lots of giant denominations and spend small ones.

How to make it give you the results you want

Whether we discover giant payments extra cognitively pleasing than small ones, need to keep away from the ache of paying, maintain observe of our spending, or dangle onto our prettiest money, the very fact is that bigger payments appear to perform fairly effectively as a self-control mechanism: we’re much less more likely to spend if we now have giant banknotes in our pockets. So, if you wish to curb your impulse purchases on a day trip, go to the ATM and take out your spending cash in $50s — the mere truth that you simply’re in possession of “real money” needs to be sufficient of a deterrent to at the very least delay you from spending it.

References:

1. Raghubir, P., Srivastava, J., & John Deighton served as editor and Brian Ratchford served as affiliate editor for this text. (2009). The Denomination Effect. Journal of Consumer Research, 36(4), 701-713.
2. Cochran, W., & Tesser, A. (1996). The “what the hell” impact: Some results of objective proximity and objective framing on efficiency. In L. L. Martin & A. Tesser (Eds.), Striving and feeling: Interactions amongst targets, have an effect on, and self-regulation (pp. 99-120). Lawrence Erlbaum Associates, Inc.
3. Mishra, H., Mishra, A., Nayakankuppam, D., & [Dawn Iacobucci served as editor and Kent B. Monroe served as associate editor for this article.]. (2006). Money: A Bias for the Whole. Journal of Consumer Research, 32(4), 541-549.
4. Soman, D., & Cheema, A. (2011). Earmarking and Partitioning: Increasing Saving by Low-Income Households. Journal of Marketing Research, 48(SPL), S14-S22.
5. Colby, H., and Chapman, G. (2011). Don’t Break the $100 Bill: Large Bills Promote Savings Behavior. Talk introduced on the Behavioral Finance Working Group Conference, March 2011, Cass School of Business, London.
6. Gilovich, T. & Belsky, G. (January 26, 2012). Why (Bill) Size Really Does Matter, Time. Available from: enterprise.time.com/2012/01/26/why-bill-size-really-does-matter/
7. Raghubir, P., Capizzani, M., and Srivastava, J. (2017). What’s in your pockets? Psychophysical biases within the estimation of cash. Journal of the Association for Consumer Research, University of Chicago Press, 2(1), 105-122.
8. Di Muro, F., & Noseworthy, T. J. (2013). Money isn’t everything, but it helps if it doesn’t look used: How the physical appearance of money influences spending. Journal of Consumer Research, 39(6), 1330-1342.