Mind Over Money

The psychology behind using cards over cash

Image Credit: Jonathan Rolande

In your wallet it is likely you’re carrying coins and banknotes, credit cards and debit cards, electronic travel cards and vouchers, as well as points on loyalty cards. But if I asked you how much money you have on you right now you’d probably only include the amount you had in cash.

We treat cash, cards and vouchers separately, so we don’t tend to calculate their combined spending power. In some instances that is logical. Try going into a pub and buying a round with a combination of a supermarket loyalty card and some book tokens and you’d get short shrift. Yet increasingly we pay for drinks — or even a drink — with debit or credit cards.

It’s convenient, but is it money-wise? Perhaps not. Only a couple of decades ago, the limit on your spending in a bar in one evening was the cash you had with you. Even if the bar staff had accepted it, you wouldn’t have got out your cheque book to pay for “one for the road.” These days the boundary between everyday money and all the money you have (in your current account at least) is increasingly blurred.

I know some people who feel that for a small purchase such as a sandwich you should always use cash. Debit cards are for bigger purchases and credit cards for luxuries and holidays. It’s a way of exerting self-control over money. It doesn’t seem right to borrow from a bank to buy a cheese-and-pickle sandwich with a credit card, if you can avoid it.

This might sound rather quaint and fastidious, but recent research suggests it’s a sound mental strategy. Researchers in the United States monitored the food shopping of 1,000 households for 6 months. Controlling for all sorts of factors, the researchers found that when people were paying by credit or debit card, they tended to make more impulsive purchases of unhealthy foods like cakes or chocolate. It seems our propensity to indulge in guilty pleasures increases when we don’t have to hand over “real” money. So going “contactless” might expand our waistlines as well as slimming down our bank accounts.

Of course it is not in the least surprising that we tend to use a card when the price is higher. It means we don’t have to carry around large sums in cash, and — in the case of a credit card — allows us to spend money we don’t actually have yet. But there’s more to it than that.

When we use a card we are not only more likely to decide to go ahead with a purchase, but our thinking changes. We are less likely to remember the amount we paid, and more likely to add a bigger tip. And as this next experiment shows, we are even prepared to spend more on the same goods.

At 1pm on Sunday 19 April 1999, the Boston Celtics began their last basketball game of the season against the Miami Heat. The match was crucial. If the Celtics were to take the division title, they needed a win. Celtics games always sold out well in advance, but MBA students at the world-famous Massachusetts Institute of Technology (MIT) in Boston were offered the chance to get their hands on a pair of tickets just the week before the game by taking part in a psychology experiment.

Psychologists who set up such experiments are notorious for their use of subterfuge, but in this instance the tickets were genuine and one lucky participant really would get to see the game with a friend. Not for free, mind. This was not a giveaway exercise. The winner would have to pay the face value of the tickets. And here’s where there was a bit of economy with the truth — the students didn’t know that. They were told they had to bid against others in a silent auction and believed that they could pay more than the standard ticket price if they chose to.

What the researchers wanted to know was the price students were prepared to pay for these precious tickets; and in particular, whether the form of payment would make any difference.

All the students were given a sheet of paper on which to write their best offer, but half of them were told they would need to pay in cash — and would be allowed to visit an ATM if necessary — while the other half were told they could pay with a credit card. How much would they offer for the tickets?

The difference was striking. Those paying cash bid an average of $28, but the card payers were prepared to offer more than double that amount: $60.

Now I say this result was striking, but even so I doubt it surprises you that much. I suspect the behaviour of the MIT students mirrors your own attitudes. It certainly does mine. Paying with cash always feels that much more real somehow; and parting with it, that much more painful. Paying with a card delays the pain and makes the transaction easier. Some would say too easy. With the increase in the availability of instant credit, personal debt in the UK, for example, more than tripled between 1990 and 2013. There is a lesson to learn from this. Whenever you are tempted to buy something on a credit card, imagine getting the same amount out of a cash machine and spending that instead.

Perhaps the card-paying MIT students could afford $60 for the basketball tickets — and thought that was a fair price. If so, okay. But I suspect they overbid, determined to win the tickets, whatever the cost, and not worrying about how they would pay for them.

One final thought on the cash or credit question. The MIT experiment took place in 1999, when students with credit cards were a relatively new phenomenon. Indeed for us all, cash-free payment is a fairly recent thing, certainly for the majority of purchases.

Now, one of the reasons why personal debt has risen is that personal finance markets have mushroomed and there are many more ways of acquiring credit. But another is surely that we are still in something of a mental transition period from cash to cashless. And during that transition our grip on “virtual” money is not as tight as it should be.

Maybe it should come as no surprise that we tend to spend it more loosely than we do “real” money.

Perhaps children growing up now, children who will almost never see their parents pay in cash, will not make the sometimes dangerous distinction between cash and cashless — respecting the first and being cavalier with the second. Indeed cash may soon disappear altogether. For people of the near future, “real” money will only be numbers on a screen. And maybe they’ll soon find virtual transactions involving lots of digital zeroes as daunting as we do handing over a stack of notes.


This is an excerpt from Mind Over Money: The Psychology of Money and How to Use It, published by Harper Perennial, and available to purchase via your preferred retailer.

For further information about Claudia Hammond, visit claudiahammond.com.

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