If you were to pay in cash, you would end up spending less. But why?
A thread on understanding human behaviour when it comes to spending in cash.... (1/n)
A thread on understanding human behaviour when it comes to spending in cash.... (1/n)
Paying with cash can be painful sometimes.
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?
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?
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 found that this doesn't happen when you use a credit card. The pain, in this case, is subtle as 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 behaviour 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 a credit card ($11.45).
But this anaesthesia that credit cards give comes at a cost.
But this anaesthesia 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 called the all-cash diet. And by that, I don’t mean that you have to start paying for everything with cash.
You could simply switch to cash from card 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 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.
This is Part 2 of Understanding Credit Cards series from Finshots. Follow @finshots for more.
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This is Part 2 of Understanding Credit Cards series from Finshots. Follow @finshots for more.
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