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The Way We Spend Impacts How We Spend

How the pain of paying impacts our experiences and how much we spend

On the surface, buying songs on iTunes and using tokens to pay for drinks at a casino may not have a lot in common, but there is actually a link between the two. When we purchase songs on iTunes, we barely feel the sting associated with payment: with a click of the “download” button, we can easily buy whatever song or video we might want (or whatever item our significant others may want; I swear that’s why I have episodes of Gossip Girl and The Bachelorette on my laptop). Along similar lines, some spas, resorts, or casinos rely on a payment system in which customers exchange already purchased tokens for various things like drinks or meals. Similar to paying for songs on iTunes, purchasing drinks with tokens just doesn’t seem to “hurt” as much.

But why is this the case? Research conducted over the last several decades in offers some insights into why certain forms of payment hurt less, and how we can change our spending patterns as a result. Drazen Prelec and George Loewenstein, for example, have written about a concept known as coupling, or how much a consumption experience and the payment for that experience are linked together in a person’s mind. When we buy something with cold hard cash, we know right away how much that thing has cost us. If I go to a Mexican restaurant and use cash to pay, the act of paying and the act of consuming my meal are very directly coupled. I know just how much I have given up to pay for my burrito when I pay with cash, and this can be painful.

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If, however, I use a credit card, there’s a break in time between when I eat my dinner and when I actually end up having to pay for it. It’s this lack of coupling that can make using the “download” button on iTunes, shelling out tokens at casinos, or paying with credit cards seem painless. All of these methods of payment feel just one step away from not paying for something at all. In a sense, the combination of credit (which itself is an abstract concept) and payment that comes at a much later point in time may act as a numbing balm for the pain that is normally associated with spending money.

In this sense, people should be willing to part with more money when using a credit card than when using cash (since it doesn’t hurt as much to pay with credit cards). Indeed, Prelec and his colleague Duncan Simester found that MBA students were willing to pay almost twice as much for an item that had an unknown market value (a pair of Red Sox tickets) when they paid with a credit card compared to when they paid with cash.

The flipside here is that if we experience more psychological pain when we purchase something, we’ll most likely enjoy it less, or opt out entirely. Brian Knutson, Scott Rick, and others performed a clever neuroimaging experiment to examine this proposition. In their study, they used fMRI to scan research participants’ brains while they made decisions about whether to buy a product or not. When subjects saw a product that was priced too high, there was a corresponding increase of neural activation in the insula, the part of the brain that has previously been associated with pain perception. But what’s really interesting is that the more the insula showed activation in response to an object’s price – that is, the more pain people felt when viewing how much an object cost – the less likely a person would be to subsequently buy that object when given the chance. The pain of paying, then, can be an effective way to ensure that we don’t overspend. But, it can also take away from an otherwise pleasurable experience (if all we’re doing is thinking about how much it hurts to spend money, it’s considerably harder to enjoy ourselves once we’ve spent that money).

The implications of this research are simple and straightforward, if not necessarily regularly practiced.

If you want to derive more enjoyment out of what you consume (think about going on vacation but being stressed about how much various things cost) then pay for the experience in advance. Doing so decouples the pain of paying from the consumption of the experience. Prelec and Loewenstein, in fact, mention a concept known as prospective accounting, in which consuming something that has already been paid for can be enjoyed as if it was free. This is akin to prepaying for a hotel room, and then having the pleasant feeling that the room was free upon receipt of the zero-balance bill.

But if your goal is to limit your spending, then carry cash with you, or literally put a freeze on your credit card: I don’t know anyone who has done this, but if you place your Visa or MasterCard in a cup with water and then freeze it, you’ll certainly have a much more difficult time quickly pulling it out the next time you want to buy something impulsively (also, having a water-damaged magnetic strip could make it slightly challenging to use that card). More to the point, if we give ourselves opportunities to use a painless payment method, we’ll also be giving ourselves opportunities to overspend.

Hal E. Hershfield, Ph.D. is an Assistant Professor of Marketing at New York University's Stern School of Business.

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