Posted by Charleston Voice
In a recent editorial written for both Numismatic News and for World Coin News, I wrote about a recent conference held in Denmark where there were serious discussions regarding the impact of a society in which physical coins and bank notes have become completely obsolete due to modern technology.
I commented that it would be interesting to read the papers delivered at this conference. Since that time Priya Raghubir, a research professor of marketing at the Stern School of Business at New York University, has provided me with the paper he presented at that conference. Raghubir’s paper, co-authored with, Joydeep Srivastava, is titled “The Denomination Effect.” [13-pg paper can be read here...CV]
The paper presents Raghubir’s study of the ways in which humans interact with money as a function of its form. More specifically his study illustrates spending habit trends that are impacted by the scenarios of either using physical cash or of using any of the many substitutes for that physical cash that are now available. Some of these substitutes are checks, debit and credit cards, and various recently invented forms of electronic transfers of money.
Considering that the paper was being presented at a discussion on what a society would be like in which coins and bank notes are no longer in use, Raghubir clarified his paper to me, saying: “I was neither suggesting that we will move to [a] cashless society or saying that we won’t, but [was] outlining some of the implications of what would happen if we do.”
He may have done more than that when you apply what he wrote to what is changing in our world today. Intentionally or unintentionally such changes as the replacement of small denomination bank notes with coins of the same denominations, larger denomination bank notes, or the withdrawal of high denomination bank notes all impact our spending habits.
Some examples to keep in mind when considering Raghubir’s study are the large denomination $1 and $2 coins of Canada, 1-pound and 2-pound coins of Great Britain, and the $1, $2, and $5 coins of Australia that have replaced bank notes of the same value in recent history. Also to be remembered is that Canada withdrew its $1,000 bank note, while the European Union continues to issue a 500-euro note, while the United States resists issuing anything higher than $100.
“The Denomination Effect” utilized three studies to determine how consumer purchases are impact by the specific monetary vehicle used in each transaction. The paper is scholarly and in more depth than needs to be explained here. What is important to understand is that in general if we as consumers carry larger denomination coins or bank notes we are more likely to hesitate to spend them than if either lower denomination coins or bank notes or their many cash substitutes are used instead.
In other words, if you are in the habit of using a debit or credit card to make purchases, you are more likely to spend your money than is the person who purposely carries larger denominations of coins or bank notes in their physical cash form.
Raghubir goes further in his study, suggesting some people will carry larger physical forms of cash on purpose to help them control their spending habits. To put this into a coin collector mentality, if you go to a coin show without a purchasing plan or a budget you will likely spend more money if you pay by using a credit card or check than if you are carrying $100 bank notes.
Why? Because as Raghubir says in his study, there is psychological pain associated with handing over your cash, especially if that cash is in larger denominations. Your favorite coin dealer, or any merchant for that matter, would rather see you coming with small denomination coins and bank notes than with larger denominations that might make you think twice before making an unplanned purchase. They would like it even better if you came with some form of electronic gizmo that allows you to transfer cash from your account to theirs.
This “denomination effect,” according to Raghubir, is chosen based on whether the person is a tightwad or a spendthrift, and if the person wants to build in self control to their spending habits. Someone wanting to preserve his money is more likely to carry larger denomination coins and bank notes than is a spendthrift.
In his summary Raghubir explains, “This article demonstrates that money is less likely to be spent when it is in the form of a single large denomination relative to several small denominations, and, therefore, consumers strategically choose to receive money in larger denominations under conditions in which they wish to save and exercise self control in spending.”
Think about it. How much more are you likely to spend when you use small denomination pocket change rather than dollar, pound, or euro denomination coins? How much less are you likely to spend when you carry a 100- or a 500-euro bank note than if you carry small denominations equal in value to one of these?
Now, looking beyond Raghubir’s paper, should governments consider the commercial spending impact on merchants and consumers when they take such actions as removing a 1-cent coin from circulation, or introduce a $2 coin replacing a bank note of the same value?
And, what about if we truly do become a society in which all commercial transactions use electronic transfers exclusively? Consumers can be irresponsible with their spending habits. Replacing all physical cash with other forms of payments will likely encourage further consumer debt. Source Numismaster
| By June 19, 2012 |
In a recent editorial written for both Numismatic News and for World Coin News, I wrote about a recent conference held in Denmark where there were serious discussions regarding the impact of a society in which physical coins and bank notes have become completely obsolete due to modern technology.
I commented that it would be interesting to read the papers delivered at this conference. Since that time Priya Raghubir, a research professor of marketing at the Stern School of Business at New York University, has provided me with the paper he presented at that conference. Raghubir’s paper, co-authored with, Joydeep Srivastava, is titled “The Denomination Effect.” [13-pg paper can be read here...CV]
The paper presents Raghubir’s study of the ways in which humans interact with money as a function of its form. More specifically his study illustrates spending habit trends that are impacted by the scenarios of either using physical cash or of using any of the many substitutes for that physical cash that are now available. Some of these substitutes are checks, debit and credit cards, and various recently invented forms of electronic transfers of money.
Considering that the paper was being presented at a discussion on what a society would be like in which coins and bank notes are no longer in use, Raghubir clarified his paper to me, saying: “I was neither suggesting that we will move to [a] cashless society or saying that we won’t, but [was] outlining some of the implications of what would happen if we do.”
He may have done more than that when you apply what he wrote to what is changing in our world today. Intentionally or unintentionally such changes as the replacement of small denomination bank notes with coins of the same denominations, larger denomination bank notes, or the withdrawal of high denomination bank notes all impact our spending habits.
Some examples to keep in mind when considering Raghubir’s study are the large denomination $1 and $2 coins of Canada, 1-pound and 2-pound coins of Great Britain, and the $1, $2, and $5 coins of Australia that have replaced bank notes of the same value in recent history. Also to be remembered is that Canada withdrew its $1,000 bank note, while the European Union continues to issue a 500-euro note, while the United States resists issuing anything higher than $100.
“The Denomination Effect” utilized three studies to determine how consumer purchases are impact by the specific monetary vehicle used in each transaction. The paper is scholarly and in more depth than needs to be explained here. What is important to understand is that in general if we as consumers carry larger denomination coins or bank notes we are more likely to hesitate to spend them than if either lower denomination coins or bank notes or their many cash substitutes are used instead.
In other words, if you are in the habit of using a debit or credit card to make purchases, you are more likely to spend your money than is the person who purposely carries larger denominations of coins or bank notes in their physical cash form.
Raghubir goes further in his study, suggesting some people will carry larger physical forms of cash on purpose to help them control their spending habits. To put this into a coin collector mentality, if you go to a coin show without a purchasing plan or a budget you will likely spend more money if you pay by using a credit card or check than if you are carrying $100 bank notes.
Why? Because as Raghubir says in his study, there is psychological pain associated with handing over your cash, especially if that cash is in larger denominations. Your favorite coin dealer, or any merchant for that matter, would rather see you coming with small denomination coins and bank notes than with larger denominations that might make you think twice before making an unplanned purchase. They would like it even better if you came with some form of electronic gizmo that allows you to transfer cash from your account to theirs.
This “denomination effect,” according to Raghubir, is chosen based on whether the person is a tightwad or a spendthrift, and if the person wants to build in self control to their spending habits. Someone wanting to preserve his money is more likely to carry larger denomination coins and bank notes than is a spendthrift.
In his summary Raghubir explains, “This article demonstrates that money is less likely to be spent when it is in the form of a single large denomination relative to several small denominations, and, therefore, consumers strategically choose to receive money in larger denominations under conditions in which they wish to save and exercise self control in spending.”
Think about it. How much more are you likely to spend when you use small denomination pocket change rather than dollar, pound, or euro denomination coins? How much less are you likely to spend when you carry a 100- or a 500-euro bank note than if you carry small denominations equal in value to one of these?
Now, looking beyond Raghubir’s paper, should governments consider the commercial spending impact on merchants and consumers when they take such actions as removing a 1-cent coin from circulation, or introduce a $2 coin replacing a bank note of the same value?
And, what about if we truly do become a society in which all commercial transactions use electronic transfers exclusively? Consumers can be irresponsible with their spending habits. Replacing all physical cash with other forms of payments will likely encourage further consumer debt. Source Numismaster
