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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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I always believed that one should use cash because it feels paying.
I think the relative reluctance of paying in cash vs paying with credit card is due to our having been conditioned to view the former medium of exchange as more valuable than the other, on account of our having paid in cash many more times than we have been paying with credit cards. As time goes by, and the new generations are getting used to pay with credit cards only (or mostly), the effect will vanish (or maybe even move to the opposite direction, with us becoming more reluctant to pay with a credit card than in cash).
Paying using a debit or credit card is not irrational per se. It is usually preferable to pay with a debit or credit card that to pay in cash for equivalent goods. In order to pay with cash, one will need to have withdrawn it from one’s bank and carried it around, thereby losing interest on it. Moreover, paying in cash typically generates change, which is often lost or forgotten and sits around unspent, exacerbating the problem. Paying with a debit card allows one to preserve funds in one’s account until the moment of the transaction. Paying with a credit card and paying off one’s balance each month is even better because it effectively defers the transaction and keeps the money in one’s account, and earning interest, for even longer.
@ Rod
I didn’t express myself accurately. I was referring to our willingness to spend more when paying with credit cards than when paying in cash. That’s what i meant by “reluctance of paying”. I was not referring to our choice of medium of exchange but to, once the choice has been made by us or by situational factors, how frugal we are in our spending depending on the medium of exchange.
I believe the issue Dan is trying to present here is the issue of dealing with cash as a limiting factor as it is a physical currency, whereas credit/debit cards have access to significantly more resources (hopefully) with the same amount of effort. This I believe goes along with the idea that self imposed guidelines are harder to impose, and generally less efficient, than hard guidelines, such as the amount of cash you have on hand.
I however take a slightly different view insofar as the way that I view cash. I believe that, simply stated, cash in your pocket is money already spent. The idea being that I can remove that belief that cash is a limited resource and see no difference between paying by card or by cash. This never introduces the extra idea of abundance of resources because the idea of money as a resource never changes. Although this is just the way I prefer to view it.
Because I perceive a psychological difference in paying cash versus using a credit card and because I am determined to live debt-free, I record all credit card purchases in my check register immediately. It makes reconciling credit card bills and my checking account balance a little more time consuming, but it keeps me honest with myself. I always know where I stand financially and never surprise myself with credit card purchases I “forgot” about.
On a macro level, the use of debit or credit cards raises all prices as the merchant needs to set prices that include the “merchant fees” charged for card use. Every card payment feeds the card company and the banks. So, even if you pay off balances to avoid interest payments, you are siphoning off a little bit per purchase, and a lot in the aggregate. Slightly off topic, or is it?
Well nice video,now I know why it used to feel weird while paying via cash while debit card always felt easy… but not everyone carries cash , u know, so did the research take into account other influential factors?
Message received clearly. Hilarious. My first laughter of the day. Thanks.
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I highly recommend Dan Ariely’s book, “The (Honest) Truth About Dishonesty”. He describes some fascinating studies that he’s done that demonstrate the significance that we put on cash as having “real value” versus any other form of funds or even physical objects. Just think about your inner emotional reaction to the idea of taking a pencil or pen home from work versus taking a quarter from the petty cash drawer.
Fun video!
You can get up to 2% cash back on some AmEx cards. So if you can control the tendency to spend more with a card, you are ahead of the game. That’s a better rate of return that 10-year Treasuries.
I didn’t express myself accurately. I was referring to our willingness to spend more when paying with credit cards than when paying in cash. That’s what i meant by “reluctance of paying”. I was not referring to our choice of medium of exchange but to, once the choice has been made by us or by situational factors, how frugal we are in our spending depending on the medium of exchange.
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