Trick Yourself into Spending Less Money Using the “Denomination Effect”
Not all dollars are created equal.
According to research performed by Priya Raghubir, people are more likely to spend small-value bills than large-value bills. She terms the brain’s preference to hold onto bigger bills the “Denomination Effect”
Dr Raghubir tested this effect by paying visitors to an Omaha gas station $5 to fill in a fake survey. The visitors were paid either with five one-dollar coins, five one-dollar bills, or one five-dollar bill.
Even though all visitors were paid the same amount, those given the five-dollar bill were more likely to save their money. The people given one-dollar bills or coins were much more likely to spend their cash immediately.
Dr Raghubir performed similar tests in China where she gave housewives payments that equaled their week’s salary. Housewives given the money in large denominations spent less than those given small denominations.
So, if you want to trick yourself into saving more money, keep the small bills out of your wallet.
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Header photograph by AMagill
Story via Planet Money Podcast
Filed in savings, thrift One Response so far
toastmaster on 07 Jun 2009 at 12:57 am #
This is absolutely true. Always fight to keep your large bills unbroken. The smaller they get the hotter they are at burning a hole in your pocket.