Thread by @finshots

How does the pain of paying affect spending?

Thread. (credit card series part 2)

In fact, in a 2001 study by MIT professors, it was seen that the area of the brain associated with pain, i.e. the insula, lights up like a Christmas tree when you watch someone pay with cash as opposed to a credit card.

But why?

Well, there’s a phenomenon called “The Pain of Paying”. When you buy things with cash, you have less of it in the wallet.

Your brain subconsciously processes this as a loss & registers the moment as painful.

This is especially true if you don't have a lot of money. You will be mindful of not overspending with limited amounts of cash.

However, studies have found that this doesn't happen when you use a credit card. The pain, in this case, is subtle because plastic is less tangible than cash. When you use a credit card you don't feel the money going out of your wallet.

There is no sense of loss, & thus no subconscious pain. In fact, a study on consumer behavior in the marketplace noted that customers who paid with cash spent significantly less money ($6.65) in a grocery store than customers who paid with credit card ($11.45).

But here’s the thing - this anesthesia that credit cards give comes at a cost. See, credit cards encourage spending.

When we hand over cash at a store, we see the money going away, but this transparency is absent in credit cards. Furthermore, credit cards are always returned back to us, which reinforces the notion that we are not losing money.

Which is why for the financially anxious there’s a popular cure known as the all-cash diet. And by that, we don’t mean that you have to cut up all of your credit cards & start paying for everything with cash.

You could simply switch to cash payments for a while to make yourself more careful about your purchases so that you don’t exceed your monthly budget. Kind of like a detox or juice cleanse of the personal finance world, isn’t it?

So the next time someone recommends an all-cash diet in a bid to encourage prudent financial spending, know that while it might feel painful, it is probably worth it.

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