The Frontal Cortex

Spending Money

One question that came up yesterday during the radio show was whether or not Americans can learn, once again, to delay gratification and save money. Can we get back the thriftiness of earlier generations? Or are we destined to be a nation with a negative savings rate?

I certainly wouldn’t want to underestimate the malleability of consumer habits, or the motivating force of seeing foreclosure signs in your neighborhood, but I think it’s worth pointing out that the steep decline in American savings rates coincided with lots of financial innovations that make it much easier for us to spend money. Just the other day at the drug store I marveled as the lady in front of me simply waved her keychain (it contained a tiny credit card) at the counter. A mere flick of the wrist – that was all it took to spend $19.95.

Why does this matter? Because there’s some suggestive evidence that the brain makes simple consumer decisions by comparing our desire for the item (as represented by areas in the dopamine reward pathway, such as the nucleus accumbens) with the pain that comes from having to pay for the item. The problem with credit cards is that they abstract the payment: Instead of taking cash out of our wallet, we just swipe this thin plastic card. As George Loewenstein, a neuroeconomist at Carnegie-Mellon says, “The nature of credit cards ensures that your brain is anaesthetized against the pain of payment.” Spending money doesn’t feel bad, so you spend more money.

Of course, there’s nothing inherently wrong with using your Visa or Mastercard. (I hate carrying around cash, so credit cards have made my life much more convenient.) But when it comes to the question of whether or not Americans can suddenly reverse long-term consumption trends – we want that shiny new HDTV, and we want it right now! – it’s worth pointing out that this isn’t simply a case of modern decadence, or of the baby boomers/Generation X not having any self-control. Instead, it’s an example of how seemingly insignificant cultural tweaks – in theory, it shouldn’t matter how we pay for things – can have profound implications.

Consider this experiment: Drazen Prelec and Duncan Simester, two business professors at MIT, organized a real life, sealed-bid auction for tickets to a Boston Celtics game. Half the participants in the auction were informed that they had to pay with cash; the other half had to pay with a credit card. Prelec and Simester then averaged the bids for the two different groups. Lo and behold, the average credit card bid was twice as high as the average cash bid. When people used their Visa or Mastercard, their bids were much more reckless. They could no longer constrain their desire, and so they spent way beyond their means. (Prelec and Simester entitled their paper: “Always Leave Home Without It”.)

If we want to get serious about our anemic savings rates, we’re going to have start finding ways to make ourselves more sensitive to the pain of payment, not less.


  1. #1 NoAstronomer
    May 14, 2009

    As my 14-year old daughter can verify, spending is even easier if you can get one of your parents to use their credit card.

  2. #2 Donna B.
    May 15, 2009

    I do not have any credit cards, but I do have a debit card that I can use in the same way at the point of purchase. Sure, I may have enough in my bank account at that point in time to cover the purchase… but it is still easier to do that dole out cash.

    The fact that I have a line of credit attached to my bank account which insures that I’m never denied makes it even worse for me.

    As safe as they seem, debit cards are not innocuous.

  3. #3 Photon
    May 15, 2009

    It certainly is psychologically easier to spend, spend, spend with plastic.

    But about that experiment: if I’m in the cash-only group and I happen to be carrying $3.14, then that’s all I can bid, and there goes your average – regardless of how much cash I’d have been willing to spend, if I happened to have it with me.

  4. #4 Pierre
    May 15, 2009

    It’s sad to think that the world runs solely on this urge to spend money. Without it, we would live a great socioeconomic cataclysm but also some form enlightenment, that this world is in great need.

  5. #5 ancientTechie
    May 15, 2009

    I seldom see mention of the fact that current savings programs are far less desirable for most people than those offered during former times. As a child, I was able to put money in a standard savings account in a local bank that payed sufficient interest to double my money, not adjusted for inflation, in seven years. Now, standard savings accounts pay next to nothing and certificates of deposit don’t even come close to matching the interest available on such accounts fifty some years ago. With many people having lost faith in a variety of investment instruments during the past few months, it may seem better to just spend one’s money rather than try to invest it at return rates that don’t even match inflation.

  6. #6 Mark Lindley
    May 15, 2009

    — After hearing part of your radio interview I picked up the New Yorker and read your article. A question: has anyone from the research areas you report on and write about commented on Eugene Gendlin’s “focusing” process and research? It seems to me there might be very interesting correlations between the importance of delayed gratification skill building and the practice of body sense awareness taught by Gendlin and his school. I think practitioners of “focusing” develop just the kind of sensitivity to impulse control that seems so important in the work you are reporting.

    A couple references:
    Focusing – Eugene T. Gendlin (1978)
    Focusing-Oriented Psychotherapy: A Manual of the Experiential Method – Gendlin (1996)

  7. #7 Alan
    May 16, 2009

    There may be another upside to holding actual legal tender. Thoughts of money supposedly soothe social rejection and ease physical pain. Zhou, X., Vohs, K. D., & Baumeister, R. F. Psychological Science doi:10.1111/j.1467-9280.2009.02353.x (2009). It would be interesting to do a study on whether thoughts of plastic have a similar effect. Maybe we view the card as simply plastic, as intrinsically worthless; our conception of banknotes is probably different.

  8. #8 tkB120
    August 9, 2009

    I am in no way an expert (I’m only a high schooler taking a psych course!), but according to this experiment, people are more conscious of the money they are spending when they physically see the cash leave their hands. A credit card stays with its owner; pieces don’t chip away as the honder spends more. The painless ‘flick of the wrist’ is the same motion whether the person is spending $5 or $5,000. Also, when people use their credit cards, they don’t have to worry about paying until the bills arrive. Ignorance and procrastination, could it get any worse?
    It’s interesting that dopamine neurons are triggered more by spending money than trading let’s say baseball cards. Essentially, it’s the same thing, exchanging one item for another, but people still experience an unexplained high when they go on a shopping spree. Maybe it’s not so much the spending of the money, but knowing the succeeding events: carrying around bags large enough to attract attention, having something new, people inquiring about the something new. Not all of that happens when you get a new baseball card.

  9. #9 credit repair
    February 18, 2011

    It is unfortunate that in these times, many young people graduating colleges and prestigious universities often leave unaccompanied by wealth but rather, by immersive debt. The youth should be more educated on the consequences of swiping that one piece of plastic. Without savings accounts, (or even with savings account – that accrue little to no return), the collected debt of student loans and the down job market it’s a giant set back rather than something that they can fall back on – a once valuable degree. I think that the past generations who actually witnessed and suffered through the great depression of the early nineteen hundreds have a greater respect and value for currency than today’s plastic crazed youth. They went without, they went hungry and the biggest thing was that they didn’t have any plastic to catch their fall. I do agree though that the experiment with the Celtics tickets should have had a control on the amount of cash (on average) that was brought, in comparison to credit limits on the other half of the group. Regardless, the point is that once you are consumed with vast debt it not only puts a hold on your life – and dreams – it can have a long lasting effect on your credit, making it nearly impossible to buy a house, car, or even that big HDTV you mentioned. There are several remedies to this epidemic that is tearing across the country. If you are in debt, stop continuing to use the same things that enabled you to get into debt! Work on repairing your credit, through the use of credit repair and credit management companies that will help un-tarnish your credit score.

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