The Denomination Effect
Human beings behave in funny ways when it comes to spending money.
In a 2009 paper, the professors Priya Raghubir and Joydeep Srivastava revealed a peculiar effect of different denominations on spending behaviour.
In their experiments, students were gifted a dollar in either high (as a $1 dollar bill) or low (as four 25c coins) denominations. The participants were then given the choice to either spend the money on sweets or save it.
Somewhat surprisingly, 63% of those holding coins opted to spend whilst only 26% of those with paper currency did so.
The study concluded that we are less likely to spend the same amount using larger notes than their equivalent value in smaller denominations.
Why?
Because psychologically speaking, we perceive larger denominations to be less replaceable than smaller ones.
This phenomenon has obvious implications for influencing spending decisions throughout society. For example, the denomination of social security payments to encourage less spending and more saving.
On a personal level, it seems we'd be wise to carry larger notes on our next shopping trip to discourage impulse purchases!
For more interesting studies like these and to learn about the behavioural science behind them check out our course on Behavioural Economics with the brilliant Rory Sutherland.
