Reluctance to make change

Conventional economics assumes the fungibility of money. For those of you who do not know what that means, it essentially implies that you are equally willing and likely to spend 10 notes of ten rupees each, or one single 100 rupee note. I’ve often noticed an interesting tendency that seems to contradict this notion.

When we are in need of something which costs us a fairly small amount, while we might be ready to spend smaller, appropriately sized denominations to acquire it, we exhibit reluctance (we are likely to reconsider the purchase) when we have to make change by breaking currency notes of higher denomination in order to be able to make that same purchase.

For example, if something costs 40 rupees, and if we only have a 500 rupee note, there is a good chance that we might avoid consuming that product just so that we can hold on to that 500 rupee currency note without having to break it up. A 50 rupee note on the other hand might’ve smoothly enabled this purchase. A phenomenon such as this definitely does not conform to the classical economics paradigm.

Further reading: Raghubir, P. and Srivastava, J.(2009)- The denomination effect, Journal of Consumer Research