When cash costs you: about the pain of holding

by Jay Zenkic, Nicole Mead & Kobe Millet
Posted on May 09, 2019

Cash is still king. Despite the ease of credit and debit cards, most people around the world still exchange bank notes and small change every single day. Many of these consumers are poor and will probably never hear of Venmo or WePay.

In the eurozone, 79% of all point-of-sale payments are made in cash (Esselink and Hernandez, 2017). Even in the Netherlands (with the lowest cash usage in the eurozone) 45% of payments are made in cash (Kumar et al., 2018). And that’s not unique to Europe: Americans use cash in 30% of all transactions.

Try to think of your last expensive purchase: a new laptop, perhaps, or a nice pair of sunglasses. Remember the pain you felt when handing over your money? The pain was real: at the moment of paying, pain flashed through your mind, lighting up the same parts of the brain as emotional pain (Mazar et al., 2017). Recent research suggests that cash is particularly “painful” to spend when compared to credit cards, cheques, and vouchers/gift cards (Prelec and Loewenstein, 1998; Raghubir and Srivastava, 2008; Soman, 2003).

To keep or to spend?

Now that’s an even more interesting question. The pain of paying has been researched extensively, but how about the pain of holding? As the research team is in the process of discovering, cash can actually be a pain to keep rather than to spend. We wanted to find out if cash (in the form of notes or coins) stimulates people to spend more.

Imagine you just paid with cash for an item in a shop. Coins in all shapes and sizes jingle happily as the shop assistant pours them into your hand – but you don’t share their happiness at all. How much money is this? What are you to do with this heavy load? Isn’t there a small little something you can buy right now, just to be freed from those annoying coins? Here: a bottle of water, or how about that magazine…?

“Instinctively we see coins as cumbersome, regardless of their value.”

Team Coins vs. Team Notes

Now for our real experiment. First you should know that just like India, China, and Ghana, Hong Kong provides $10 in both coins and notes. We asked our American participants online to imagine visiting Hong Kong, and receiving change amounting to the equivalent of about €11. The money was divided into either 10 coins (in the case of Team Coins) or 10 notes (for Team Notes). Team Coins thought that their coins would be much more annoying than the notes received by Team Notes.

We then asked our participants to imagine walking past a beggar. Would they donate any of their money? Team Coins would have given away (in their imagination) 3.5 coins on average, while Team Notes would only part with 2.9 notes on average. Which allows us to conclude that yes, coins possibly make us spend more. Instinctively we see coins as cumbersome, regardless of their value.

More notes, more value

But what about a mix of notes and coins? That’s what people usually receive, after all. So we decided to run the same experiment again, this time with combinations of coins and notes. We also decided to ask Europeans instead of Americans, to find out if they might behave the same or not.

In one condition, our participants were asked to imagine receiving 8 coins and 2 notes; in the other condition they imagined receiving 8 notes and 2 coins. When participants had 8 coins, they expected them to be a pain and donated 2.5 of them on average. When they had 8 notes, they expected them to be less of a pain and donated only 1.8 of them on average. In both cases, the money that was donated were almost always coins, not notes. Even when participants only imagined 2 coins, they were likely to give them away.

From imaginative experiment to the real world

We are, obviously, eager to test what we’ve discovered in non-hypothetical situations. What happens in real purchasing and donation situations, experienced by common consumers? We turned our gaze to India, which knows 5, 10 and 20 rupees in both coins and notes. Most citizens rely on these for their daily purchases. People in the rural villages earn only 300 rupees per day (less than €4).

Our principal researcher, Jay Zenkic, is now working with everyday people in the city of Hyderabad, India, and in rural villages far away from the city. We want to find out whether these modest people spend more when they receive their money in coins rather than notes. And if they do spend more coins, can we help them to save more of their money? We can’t wait to find out.

To run one of our experiments in India, we partnered up with a canteen that serves breakfast, lunch and dinner to people from all walks of life. We will be asking people on their way to lunch to complete a short survey about the canteen’s food. The canteen serves a variety of dishes and extras that can lead to spending ranging from 30 to 100+ rupees for lunch (about 40 cents to €1.30). In exchange for their cooperation, we will pay people 100 rupees in either coins or notes just before they go to buy their food. We expect that those who receive coins will spend more money.