Costly Choices

The Psychology of Choosing, Spending, and Planning Ahead

Feeling Rich on Payday

When you are paid affects how you make your decisions.

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How long until payday?
When did your last paycheck arrive? If people are able to smooth their consumption over time (draw a little from savings or put a little bit on the credit card when times are tough), the timing and frequency of paychecks should not have any effect on behavior. But it does. It can even affect mortality rates. (Really! Keep reading, I’ll explain below.) 

Take the example of Robert and Suzanne. Each of them earns about $52,000 per year, but they happen to be paid on different intervals. Robert is paid $4,300 on the first day of each month and Suzanne is paid $1,000 on the first day of each week. How does the mere difference in payday timing affect them? Until the last week, at any given time, Robert has more cash-on-hand than Suzanne does. As a result, Robert feels less constrained even though he’s earning the same income. As the month winds down, Robert feels more and more constrained until the last week, when he is equally constrained as Suzanne until the next paycheck hits.

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It turns out that this feeling of constraint affects how Robert and Suzanne make purchase decisions. In a paper based on my dissertation, I examined the causes and consequences of opportunity cost consideration. When do we think about forgone alternatives, the things we don’t buy, when we make purchases? One of the key causes is a feeling of financial constraint. If you have $10 to cover your expenses for the day, it’s not surprising that you would spend less at breakfast than if you had $40. Just as importantly, though, you think through the decision in a fundamentally different way: if you only have $10 instead of $40, you pay more attention to other things that you could spend that money on instead—in other words, you pay more attention to your opportunity costs.

What does this mean for Suzanne and Robert? It means Suzanne is more likely to consider her opportunity costs over the entire month because she is constantly constrained whereas Robert will only consider his at the end of the month. To test this, I brought volunteers into the lab and gave them a simulated paycheck that was either large but infrequent (like Robert’s) or small but frequent (like Suzanne’s). Those given small but frequent paychecks paid more attention to other ways they could spend their money than did those given large but infrequent paychecks. In a second test, I asked another set of volunteers to report how frequently they were paid and the extent to which they thought about other ways they could use their money when making purchases. Replicating the lab results, volunteers paid with frequent small paychecks considered their opportunity costs more than those paid with infrequent large paychecks, even controlling for annual income.

In this research, my focus was on the individual-level psychological process: what inputs do people use in their decisions? But these payday effects affect consumer spending and consumption to a measurable extent. Marvin Stephens, Jr. reports that in a sample of British consumers, spending is highest just after payday and decreases until the next payday. Not only do consumers spend less, they also consume less. Jesse Shapiro examined how daily calorie consumption among food stamp recipients varied with day of receipt: “Caloric intake declines by 10 to 15 percent over the food stamp month.” That research focuses on a somewhat different explanation (hyperbolic discounting, to be tackled in a future post), but I would happily wager that changes in opportunity cost consideration over the course of the month play a role as well.

So how is it that payday effects can affect mortality rates? William Evans and Timothy Moore found that mortality rates are highest just after income receipts and lowest just before. Various sorts of consumption carry risks: drinking alcohol can lead to dangerous behavior, driving to the movies or out to dinner increases the likelihood of traffic accidents (it’s hard to get in a traffic accident if you can’t afford to leave the house), and recreational activity can increase the rates of heart attacks. Together, these causes add up. Consumption increases on payday, and with greater consumption comes higher mortality rates.

Stretching beyond the data, these payday effects on consumption probably affects time allocation decisions as well. At the beginning of the day, you may feel like you have all the time in the world; by the time end of business approaches, “where did all that time slip away?” is a common sentiment. Early in the morning, a decision to read a New York Times article (or perhaps a Psychology Today blog entry) feels nearly costless. By late afternoon, as deadlines loom, the decision changes from one of “Do I want to read this or not?” to one of “Do I want to read this or finish my assignment?” Depending on how important that assignment is, it could be a powerful deterrent to slacking off. So if you want to be able to make your rounds of the internet guilt-free, do so in the morning. If you want to get something done, put your web-surfing off until the afternoon; chances are you’ll have a change of heart!

Stephen Spiller, Ph.D., is an Assistant Professor of Marketing at the UCLA Anderson School of Management. He researches consumer financial decisions, consumer planning, and the psychology of money. more...

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