Imagine the following: you go to the office and on the way stop at a regular coffee shop. You take your usual big mocha and with a hungry look look at the maiden with ham and cheese. Breakfast didn’t saturate you as much as usual and you feel uncomfortable. You look in your wallet and see that you have two $ 5 bills. You buy coffee and a sandwich. And now imagine the following: the same scenario, but if you look in your wallet, you will see a $ 5 and $ 50 bill. Chances are, this time you’ll miss the panini. Why? Because of the denomination effect.
What is the effect of denomination?
The denomination effect describes our greater willingness to spend money when we use smaller denominations; despite the fact that a $ 100 bill has the same value as ten $ 10 bills, we are more likely to spend $ 10 bills before we even think about touching $ 100.
The term “denomination effect” was coined by marketing professors Priya Raghubir and Joydip Srivastova in their 2009 research paper. on cost behavior. In their first experiment, students from two American universities were given a small amount of money – ostensibly as a thank you for attending an experimental session – and told they could either leave the money or spend it on candy. One set of students was given four 25-cent coins and the other 1 dollar. Sixty-three percent of participants from the four quarters decided to buy candy, while only 26 percent of those who received a $ 1 bill spent the money. Researchers have concluded that people are more likely to spend money of lower denomination.
They then interviewed customers at the gas station to see if the denomination effect persisted in real-world situations. Seventy-five customers were asked to answer a short questionnaire about the use of gas, and then as a thank you for the time received either $ 5 bills or 5 bills. Customers then went to the store to pay for gas, and when they came out, the researchers asked for their checks. They found that only every 6 of those who received a $ 5 bill decided to spend it, compared to about 1 in 4 of those who received a $ 1 bill.
Wanting to know if this effect was special to American culture, the researchers moved their study to China. One hundred and fifty housewives were given an envelope with money in exchange for filling out a survey. The envelope contained one 100 yuan (CNY) banknote (equivalent to about $ 14.63, and a fairly significant amount of money for these women), or five banknotes that were equivalent in value. Women were told they could leave money or buy any household goods. Compared to women who received one 100 yuan bill, twice as many women who received smaller banknotes decided to buy something. Of the women who bought groceries, those who broke a large banknote were less satisfied with their purchases than those who used smaller denominations. Apparently, larger banknotes were more painful to spend.
Interestingly, the results of two of their three studies also showed that after deciding to spend, people who decided to break a higher denomination banknote spent more than those who decided to spend money of a lower denomination. Researchers attribute this to the “what the hell” effect. what happens when we promise ourselves that we’re going to show composure in a certain situation – like drinking at a party with friends or buying during a sale at our favorite store – but we break that promise and then find ourselves doing even more of what either, we tried to do less.
How it works
Several theories have been proposed to account for the effect of denomination. One of the first was the “curse in general” expressed in 2006 by marketing professors Arulam Mishra, Himanshu Mishra and Dhanaji Nayakankuppam. Their study found that larger denominations of money ($ 100 or $ 50) were associated with less intention to spend than the equivalent amount of money in smaller denominations (ten $ 10 bills or ten $ 5 bills). Professors argued that we tend to feel more valuable when money is in the form of a large, single denomination because of the greater fluency we feel when we process a large denomination compared to many smaller denominations. This greater fluency makes us feel good, and we transfer that feeling to the money itself, forcing us to overestimate “everything” and be less likely to spend it compared to the equivalent amount of money in small bills.
Raghubir and Srivastov disagree. They believe that large bills are psychologically less replaceable than small ones, and that this notion leads people to believe that they are less easy to spend, making large banknotes attractive to those who want to control their spending. Helen Colby, an associate professor of marketing, also believes that frugal people use large bills to save money, but she believes it works thanks to the breakdown. Inspired by research showing that splitting cash into envelopes reduces consumption and increases savings, she designed and conducted a study that showed that large bills are almost as good as envelopes when it comes to helping us keep track of our money and limit our spending .
Another theory was put forward in an article by Thomas Gilovich and Gary Bielski in Time magazine in 2012, who believe that the denomination effect may have something to do with the concept of mental accounting – individual mental accounts that we maintain for different cost categories such as rent, food and entertainment so we can organize and monitor our financial activities. They suggest that we attribute small denomination banknotes to the “small cash” account that will be spent on trifles, while large banknotes are considered “real money” that can be spent on things that are of great value or saved on the black day.
The last two notable proposals put forward to explain the effect of denomination are: 1) we do not want to break large bills because it will lead to changes in smaller denominations that will be harder to control and track and 2) that we prefer clean accounts to unclean accounts that have been contaminated by others, and “proud to have accounts that can be spent next to others”. Because small denominations are used more often and tend to be more polluted than large ones, we prefer to save large bills and spend small ones.
How to make it work for you
Whether we find large bills more enjoyable to understand than small ones, want to avoid the pain of paying, keep track of our expenses, or stick to our most beautiful cash, the fact is that larger bills seem to work pretty well as a mechanism self-control: we are less likely to spend when we have large bills in our wallet. So if you want to curb your impulsive shopping on a walk, go to an ATM and withdraw $ 50 money – one fact that you have “real money” should be enough to at least delay you from spending.
- Raghubir P., Shrivastova J. and John Dayton were the editors, and Brian Ratchford was the deputy editor of this article. (2009). Denomination effect. Journal of Consumer Research, 36(4), 701-713.
- Cochran, W., & Tesser, A. (1996). The “damn” effect: some effects of proximity to the goal and goal formation on performance. In LL Martin and A. Tessera (Eds.), Aspiration and Feeling: The Interaction between Goals, Affect, and Self-Regulation (pp. 99-120). Lawrence Erlbaum Associates, Inc.
- Mishra, H., Mishra, A., Nayakankuppam, D., & [Dawn Iacobucci served as editor and Kent B. Monroe served as associate editor for this article.]. (2006). Money: Prejudice for everything. Journal of Consumer Research, 32(4), 541-549.
- Soman, D., & Cheema, A. (2011). Purpose and divisions: increase savings in low-income families. Journal of Marketing Research, 48(SPL), S14-S22.
- Colby, H., & Chapman, G. (2011). Don’t break a $ 100 bill: large bills help save. Conversation presented at the Conference of the Working Group on Behavioral Finance in March 2011, Cass School of Business, London.
- Gilovich T. & Belsky G. (January 26, 2012). Why size (bill) really matters, Time. Available from: business.time.com/2012/01/26/why-bill-size-really-does-matter/
- Ragubir, P., Kapitzani, M., and Srivastova, J. (2017). What do you have in your wallet? Psychophysical bias in the evaluation of money. Journal of the Consumer Research Association, University of Chicago Press, 2(1), 105-122.
- Di Muro, F., & Noseworthy, TJ (2013). Money isn’t everything, but it helps when it doesn’t look used: how the look of money affects spending. Journal of Consumer Research, 39(6), 1330-1342.
https://scitechdaily.com/the-denomination-effect-why-you-are-more-likely-to-hang-onto-a-100-bill-than-five-20s/ Why do you keep a $ 100 bill more often than $ 5 20