Friday, October 24, 2008

Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior

You always knew it was a lot harder to pull money out of your wallet rather than a credit card. It is now a proven fact according to a study produced by Priya Raghubir, PhD, of the Stern School of Business at New York University, and Joydeep Srivastava, PhD, of the Robert H. Smith School of Business at the University of Maryland, College Park. Their study showed that people were willing to spend more when they used plastic money.

The conceptual underpinning of our research is that payment modes differ in transparency or the vividness with which individuals can feel the outflow of money, with cash being the most transparent payment mode. We argue that the more transparent the payment outflow, the greater the aversion to spending or higher the “pain of paying” (Prelec & Loewenstein, 1998), leading to less transparent payment modes such as credit cards and gift cards (vs. cash) being more easily spent or treated as play or “monopoly money.” Further, to the extent that the transparency of paying underlies differences in spending behavior, altering the salience of parting with money should attenuate the difference across payment modes.

Want to cut back on your expenditures, then experience the “pain of paying” by using cash. Are we no more than rats in a cage responding to electro shock?

You can download the study at APA Online.

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