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Posted by on in Rajan Sambandam
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Pennies and Pounds: The Denomination Effect and the What-the-Hell Effect

I know what you are thinking. This sounds like a joke, but it is not. There really is a What-The-Hell Effect and we will get to it in a moment. First let’s talk about the Denomination Effect. Let’s say you are leaving home and want to carry some cash with you. You have the choice of either taking a $20 bill or $20 in smaller denominations. Should this make any real difference to how much you are likely to spend? After all $20 is $20, right? Not quite. Turns out the denomination in which money is carried does have an impact on spending behavior. Two researchers recently published an article detailing the effects and we’ll take a closer look at it here.

Similar issues (technically known as descriptive invariance) have been tested before, but this is the first time that this effect has been clearly shown with an explanation for why it was occurring. The researchers conducted a series of experiments aimed at identifying the differences in spending that can occur with various denominations and why it was happening. The theory is that people will find it easier to spend smaller denominations than larger ones. 

In the first series of experiments, participants were given compensation for taking part in a (cover) study. The incentives were provided either as $1 bills or 4 quarters. Participants were then given the option of keeping the money or buying some candy with it. 63% of those in the four quarter condition chose to buy the candy while only 26% in the dollar bill condition did so. Of course, it is possible that they did not want to carry loose change and hence decided to buy the candy. It may have nothing to do with the denomination. This is what is known as a confounding factor in experimental language.              

So in the second experiment a different approach was taken. Drivers at a gas station were given a short survey and the incentives provided were in the form of either a $5 bill or five $1 bills. They were then told that they could buy something from the convenience store with that money or hold on to it. If they did buy something from the store the researchers got their receipts to tally exactly what non-gas related purchase they had made. When a logistic regression model was run on the likelihood of spending the money on a purchase, it showed that the purchase likelihood was higher (24%) when five $1 bills were given as compared to when a $5 bill was given (16%).

You might say these are pretty small amounts and further assert that such things may not happen with “real” money. To address that issue the third experiment was conducted in China where the incentives were RMB 100 and the experimental participants were women between the ages of 25 and 45. This amount was about a quarter of their monthly incomes. Clearly a consequential amount. After a cover survey, they were given the incentives as either a single bill or smaller change (one 50, two 20s and two 5s). They were then shown some household products (soap, shampoo, bedding, pots and pans) for potential purchase with that money. Twice as many women in the small denomination case ended up spending the money.         

So that is the Denomination Effect. But what exactly is the What-the-hell effect? What we have seen so far is that people are more likely to spend when given smaller denominations. The large denomination seems to hold people from spending it imposing some level of self-control. However, there is a significant change that seems to happen once the decision to spend has been made. When looking at only those who are spending the money, it turns out that those with the larger denomination actually spend more of their money. In other words, once the decision to spend has been made people say to themselves “what the hell” and end up spending a lot! Perhaps there is truth in the old saying “in for a penny in for a pound”.

But it is not as if this is happening unconsciously. In a subsequent experiment designed to test self control the researchers show that people who want to not spend seem to choose higher denominations just so they can control themselves. In fact if the experimental participants are measured on a tightwad-spendthrift scale, it turns out that tightwads choose larger denominations as that will prevent them from spending more. Spendthrifts don’t fear overspending so the denomination makes no difference to them. It is just that once the self-control is broken and the decision to spend has been made larger denominations lead to more spending. This is not that different from the Shopping Momentum Effect that we have seen before.          

This series of studies have shown that people spend smaller denominations more easily and that when they don’t want to spend they strategically choose larger denominations. Do studies like these have any broader implications? Say in areas such as stimulating consumer spending in a bad economy by providing tax rebates and getting people to spend more? Yes indeed. That was one reason you received the stimulus money as small additions to your paycheck rather than as one big lump sum, as that would have led to more saving and less spending.   

This research was conducted by Priya Raghubir, Professor of Marketing at New York University and Joydeep Srivastava, Associate Professor of Marketing at the University of Maryland. It was published in the Journal of Consumer Research. 

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