In a study that will appear in December’s issue of the Journal of Consumer Research (but which was published online last month), Priya Raghubir and Joydeep Srivastava argue that “the denomination effect” makes us less likely to spend large denominations (a $20 bill, for example) than small denominations (such as twenty $1 bills):
The results suggest that the denomination effect occurs because large denominations are psychologically less fungible than smaller ones, allowing them to be used as a strategic device to control and regulate spending.
In other words, people have psychological barriers to spending large bills. This means that, as a little money hack, you can reduce your spending by carrying $10s and $20s instead of $1s and $5s. In fact, that seems to be what many people do already.
The authors conclude that some consumers intentionally choose to receive money in large denominations if they want to prevent themselves from spending it. They write: “Tightwads prefer to be paid in a large denomination when the need for self-control is high but prefer to be paid in many small denominations when there is no need for self-control.” Spendthrifts don’t have a preference.
Why is this? The authors surmise that tightwads feel the “pain of paying” more acutely than do spendthrifts. Because of this, choosing large bills may help them pinch their pennies. From the article:
Tightwads may be tightwads because they fear spending even though they are aware that they spend less than they would like to, and spendthrifts may be spendthrifts because they do not fear spending even though they are aware that they spend more than they would like to.
The authors note, however, that once a large bill is broken, the consumer may be more likely to spend. This is “similar in spirit to the shopping momentum effect in which an initial purchase provides the momentum for a second unrelated purchase.” (We discussed shopping momentum last year.)
Want to hold onto your cash longer? When possible, opt to carry bigger bills!
J.D.’s note: I want to see more research on this. When I carry big bills, all that means is that I’m likely to spend more money…
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