A recent article on this blog discussed the likelihood that we will soon move to a cashless society. It is therefore interesting to consider the implications that this might have for consumer behaviour. We might expect the form of payment to make no difference to a rational consumer. However, there is considerable evidence to suggest that this is not the case.
One reason why people appear to spend more freely on credit cards is payment decoupling – you get utility from the item purchased before you pay the cost. However, more recent evidence suggests that this is not the only relevant factor. It appears that the degree of transparency of the payment method also has an effect. Psychologists quoted in the above article conclude from their experimental evidence that:
Payment modes differ in the transparency with which individuals can feel the outflow of money. ….with cash being the most transparent payment mode.
This effect also appears to make people spend cash less freely.
The author of the above article spent some time experimenting with trying to make all his purchases using cash. He found that by doing so, he was able to reduce his spending by about 10%. However, this seems likely to become harder to do in the future and, as the article concludes, it is already difficult to purchase some items with cash.
Why does foreign money seem like play money? Science Codex (04/06/07)
- What type of products is it already difficult to purchase with cash?
- How did the psychologists test the transparency of payment methods?
- Do you think the consumer behaviour described above is likely to persist in the long-run?
- Might firms be able to take advantage of the consumers behave described above?
- Do you think the transparency of foreign currencies is the main reason why people spend more when they are abroad?