In a study on two major apartment complexes in the US, researchers found that people spent less on laundry when their machine accepted coins than when using a prepaid card system. In a nutshell, paying by card influenced the apartment residents to spend more on their laundry!
The fact that paying hurts seems rather obvious, doesn’t it? If, given the option, we’d never part with our money! Yet in the real world, we’re unfortunately required to do so almost every single day of our lives.
But what’s fascinating about this bias is the fact that it’s all about how observable or transparent the payment actually is. The lower the payment transparency or the less tangible a payment is, the more we consume. Cash is the most transparent form of payment; when we hand over those notes and coins, we can see, feel and smell them.
This serves as a solid explanation as to why many of us run into credit card debt - paying using a piece of plastic makes the payment far less transparent than when we use money, influencing us to spend more, proving that credit cards can be a dangerous thing. What you can’t see won’t immediately hurt you…
In another, similar experiment, it was found that when asked to bid for a pair of tickets to a sports event, those who were told they would be paying by credit card bid a significantly larger amount than those who were told they’d be paying by cash (Prelec and Simester, 2001). Crazy hey?
And when considering credit cards and cheques, cheques are the lesser of the two evils. Soman (2001) has found that consumers who paid for a product by credit card rather than cheque experienced less psychological pain and were more willing to incur a given expense. Cheques appear to take that middle road between cash and card; physical, yet nevertheless abstract in principle.