For Duke’s Fuqua Faculty Conversation series, I talk about one of the most interesting aspects of the psychology of money: The pain of paying. (See the original post here).
Hi, I’m Dan Ariely. I do research in behavioral economics and try to describe it in plain language. These findings have enriched my life, and my hope is that they will do the same for you.
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Oh, this is good – your example of paying by the bite is exactly what Amazon is doing when you pay per episode!
BTW: I also dislike paying with cash because it means I’ll have to go to the ATM and get more cash more often.
I irrationally drive by cheaper gas stations to go to an Exxon. My first credit card, given to me by my Dad, was an Esso card (back in the day). Although I can buy gas for less, I prefer to have all my gas charges on one card and in doing so, I pay more.
Talk about the pain of paying.
Changing pricing structure is a under examined marketing strategy for companies if they understand what consumers actually do when they purchase. Thermostats that would be converted to dollars being spent would have an enormous impact on reducing energy costs. But who would have the incentive to do this?
Dan, another great topic. These video broadcasts always spark some ideas.
Thanks.
Dan, in Yorkshire there is an old word “Thoil” as in – I couldn’t thoil that hat you cite as an example. I now know that this means – I can afford it but I don’t want the pain of paying. I think this comes under the heading of “things our Grandma’s know” as Nassim Nicholas Talab would no doubt say.
Grandmas – oops.
I feel completely opposite: credit card feels worse. I never buy anything on credit, I pay my bill at the end of the month, and I know that anythign bought on credit card is spent money just the same. Yet when I pay with credit card, I am reminded that some bank is sticking themselves between me and the business and taking some of the money and I feel manipulated. Cash feels better to me. And I never understood how anyone falls for the idea that credit card is any different in terms of paying. It’s just digital cash really, it’s debit. That anyone actually uses credit cards for actual credit is absurd, well it should be, but I understand people are irrational.
I guess I should clarify. The simple way to put it is: I *always* am sensitive to paying. I see the culture around me being so reckless, so unsustainable, that I am not comfortable letting go because I can’t trust the system and people around me to be responsible. So I never turn off the pain of paying. If I do an all-you-can-eat deal, I still think about how it works in terms of consumption of resources systematically. I don’t like a world where everyone individually thinks just about their own consumption and payment. I want everyone to think about their consumption from and payment into the general economy and the commons.
All this convinces me that I have basically the same human tendencies and pain of paying as everyone else, but I am much much less self-centered. I feel pain of paying because fossil fuels are being burned and it doesn’t even matter to me who paid for it, for example. And really, most people probably don’t want to live like me at all. If everyone else met me half-way, maybe I’d become comfortable letting go more, and I’d probably feel better. Sheesh.
When there is a choice to pay with cash or credit card, I chose to pay with a credit card. And it’s not because I am attached to cash, but I know that by paying by the credit card, I first (1) delay the payment by 30 days, and (2) I get money back by using the credit card, because the credit card has 1%-5% cash back program. This way I am actually getting more money than I’d be paying by cash.
So my reasoning is quite different from Dan’s.
Very interesting! I think this is precisely why we have a society that is so entrenched in debt. We have become so disconnected from the pain of paying by using credit cards or even debit cards that we are not frugal. I think I need to switch to cash like Dave remsey suggests then you really realize where your hard earned $$$$ is going.
What an interesting presentation and it was nice to see an example of the effects of pay plans on both the consumer of the good and the company offering it.
I wonder what will happen with Netflix’s recent promotions. Will they end up with an uptick in subscribers because they offer a full series immediately that only subscribers can see? I was surprised that they are offering the first month free on their website as well. Sounds too good to be true. Who in the end will feel the pain of the payment, the buyer or seller?
Excellent Dan. Thank you
shmiller
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Is there something like negative pain of paying?
Consider the following example: you are paying your bill at the grocery store. You are paying in cash and you need some spare change. You empty your vallet on the counter and, when the lady picks the amount you own her, you collect the rest.
There is no pain since there is no paying. Even more, the feeling is good since you keep a portion of your money,
You mean you suppose to feel good while getting change? So you pay $20 and get 45 cents back – why do you think you will feel good?
(Sorry for my English)
Please pay attention to the fact that, in the example of the ideal gift, we have a joint account. What makes the gift ideal is the absence of the act of paying (“No Woman No Cry”). The hat is not free after all.
In my example, you may want to trick yourself and try to skip a part of the act of paying. You generously offer all you have, then she takes ONLY a part of it. Your gain is not in getting your money BACK since you din^t mean to give it away (not the whole amount). but in KEEPING certain amount after all.
Verakot,
yes that is exactly how irrational we all are! I used to have a friend who sold high end home cinema systems. He used to keep a jar of cookies and when people were dithering on a 10k purchase the cookie would swing the sale for him!
John Swain,
A jar of cookies would not persuade me to buy anything. Am I just not irrational?
This is a great post and makes a lot of sense when I think about my own consumption habits.
I was wondering how does this relate to purchasing products with a future benefit (or in many cases lack there of), for example insurance? Are there ways one can reduce the pain of purchasing a product that has no immediate payoff? How do companies think about this? Are there other examples similar to this?
>>for example insurance
I can’t justify paying for insurance. I only pay for insurance that is forced (car insurance, home insurance etc). I never pay for life insurance or other types of insurance that I consider just a waste of money.
What about protecting your biggest asset – yourself? Is it not rational to protect against your investment in education and training from an illness or accident that could take you out of the workforce?
>>Is it not rational to protect against your investment in education and training from an illness or accident that could take you out of the workforce?
There are lots of things that would not protect you even if you pay insurance for it: acts of war, asteroid hitting the Earth etc. It is rational to pay money for what you cannot be protested against?
Look at children: they are much more demanding when their parents use credit cards than cash.
So true…Just a thought….During family or friendly dinners at restaurants when it is not clear who is going to foot the bill, people often don’t enjoy the meal in anticipation of the bill amount and worrying about it going out of their pocket. However, if it is made clear right at the beginning as to who would be treating, people would actually savor the food more…
Well, people are not irrational in this case. You frields will be loading on the food knowing that you are paying for it!
In a one period game, the pain of paying is a function of the pain of earning money.
The nastier boss you have, the higher the pain of paying is.
One other issue is when you are in a scenario where you will not have a cosigner then you may really want to try to make use of all of your school funding options. You can find many funds and other grants that will supply you with finances to help with school expenses. Thanks for the post.
Reblogged this on Te Mo 143.
Dear Dan,
Thank you for this post.
I have an area of interest that I have been trying to clarify for a while now: How can we consider the monthly payments of the services of a psychologist for a medium-term client (or patient?) in an agreement to pay at the end of each month for the month’s sessions? What are the feelings/ emotional/ rational reactions that may be triggered both for the MD and for the client – e.g. in case the payment is on time and/ or in case it is not on time (excluding extreme financial constraints for the client)? What could be the resistance to make a payment on time or what could be the incentive to do it on time?
Many thanks again for your great work.
I have a committment to pay my credit cards in full each month so that pain of paying for me happens when I have to take a chunk off money and apply it to my card. So I find it very satisfying to pay for a meal (a movie, a coffee) with cash, knowing that the experience is complete, fairly enjoyed and there is no carry over that I have to deal with later. Perhaps it’s all where we set our pain points that makes this workd.
How do you term spending with Paypal when the money you are spending is from things you would have thrown away but instead sold on Ebay?
It is definitely less painful for me to pay by cash. I have heard others say that people would rather pay by card, that its less painful to pay by cash but for me, cash is less painful. I can go online and see EXACTLY what I blew my money on with a card. Its accountability that I cannot escape from. Cash just seems to fly out of my pocket and where does it go? Who can say? No, with a card I know where it went and I get to relive that pain every time I look at my transaction list. Because I spend so freely with cash – I feel like a naughty schoolboy sneaking purchases I cannot possibly justify – I usually use a card and that way I spend less money.
The other reason I use a card is that i worry about cash making me a target of robbery. I can report a stolen card faster than robbers can spend my money but cash, once gone, is gone forever.
Reblogged this on alou1reda and commented:
Good point
I just shared it in one of the Israeli consumer forums. Someone had written about a gas station publishing a cheap price seen from the road. The price seen from the road is for cash payments. The more expensive price for credit card payments is published in smaller letters. So, I suggested switching to cash payments.
An intriguing discussion is definitely worth comment.
I do believe that you need to publish more about this topic, it might
not be a taboo matter but usually people don’t speak about such topics. To the next! All the best!!