Vik Tantry’s video blog, kanjoh.com, is dedicated to teaching people about personal finance.
Small bills are very convenient to carry around. After all, they do make it easy to pay in exact change. But according to a recent study published in the Journal of Consumer Research, carrying small bills can actually cause you to spend more on impulse than you otherwise would.
This phenomenon is called the “denomination effect,” and has a lot to do with the ease of making a purchase. For example, let’s say that I walk into a souvenir shop and see a baseball cap I just have to buy. After tax, the cost of the cap comes to exactly $13.00. If I had exact change (say a ten and three ones), it would be very easy for me to complete the transaction. However, if I were only carrying twenty dollar bills, then the transaction becomes a bit of a hassle. I’d have to break a crisp new twenty, and then count my change. Psychologically, breaking a large bill makes it seem like I’m spending more, thus increasing the probability that I’d reconsider the impulse buy.
A study conducted at UC Berkeley demonstrated how the denomination effect influences spending. One group of students was given one dollar bills, while each person in a second group was given four quarters. All of the students in both groups were given a choice: either keep the money, or spend it to buy candy. In the first group, less than a third of the students spent the money, while nearly two-thirds of the second group spent some of their quarters. Clearly, the idea “breaking the dollar” had some psychological impact on the students.
The denomination effect actually has even more power with larger notes. Studies show that you are far more likely to pass on a purchase if you only carry fifty or hundred-dollar bills. But there is a catch: once you do break a large bill by buying something, you are far more likely to go on a shopping spree. This is also psychological; once people commit to breaking a large bill, they often mentally commit to spending all of it. They have fired up the “impulse to buy,” and when they realize they still have cash in their pocket, they figure why not spend a little more?
In a recession, we are all looking for ways to save money. Ironically, carrying larger amounts of cash around may very well be a solution! If you are looking for a way to curtail your impulse buying, try experimenting with carrying larger bills for a few weeks. Keep track of your spending, and see if it helps. Of course, this in itself is not a full-fledged solution – it is always important to spend carefully and budget wisely. But maybe a few psychological tricks now and again can help us move in the right direction.
I know that if I carry cash around, I spend it. What about you? Are you influenced by the denomination effect?