Today’s BBC Business Daily reports on new and fascinating research by Professor Priya Raghubir Stern School of Business, NYU. Prof. Raghubir has found, in her research, that contrary to the economists’ assumption of rationality, how much money people spend depends on what jingles, or rustles, in their pockets. $50 in small notes and coins? We spend it freely. One big note, like $50? We hesitate to break it to spend it. 

Professor Raghubir notes:

We spend more in small denominations than with single large bill. Why? People fear, if they break large bill, they will have no control over it, it will go away. If they hold on to large denominations, they are more likely to maintain self-control.

This is only one of many mechanisms that we develop to control our own selves, and protect ourselves against ourselves.

Is this finding robust across different cultures?

We found it in 3 different countries: First, in the U.S., where we replicated it with children. Pre-schoolers were not prone to this effect, they think that lots of little coins is more money than paper…something called “numerosity.” But for older children, as with adults, five $1 bills, or coins were far more likely to be spent than one $5 bill. Second, we showed this in India, with a 500 rupee note vs. smaller notes. Third, I’ve shown it in China, with a group of housewives in Shiangtan, the effects were spectacular. There, people were far less likely to spend 100 yuan given in one banknote than when given 100 yuan in small denominations. 

All of us who travel know there is what Prof. Raghubir calls a foreign currency effect:

If I’m used to spending 1 dollar for cup of coffee, I will tend to spend 1 dollar for it in Canada, (worth only 67 U.S. cents), one pound in the UK, worth about $1.50, or one euro in Europe (also worth about $1.50). People inadequately adjust for exchange rates.  

So, does this mean we are dopes, and dupes? Not at all. Quite the opposite. It means that people are clever in devising ways to guard themselves against short-termitis, the tendency to spend and enjoy now rather than in the future.   

Do you also behave in this way? asked the BBC interviewer of Prof. Rughabir.

Of course, she said. 

Conclusion: In your business model, do sweat the small stuff. Because people do sweat (spend) it. Nickel and dime your business model, and you can boost your revenues.

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