Research Highlights
To Control Spending, Stock Your Wallet with a Few Large Bills
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The research has important implications for resource valuation and allocation decisions.
One of the basic tasks of personal finance, according to economic psychologists, involves how you spend what’s in your wallet. Perhaps even more basic is how you keep track of the wallet’s cash contents. NYU Stern Professor Priya Raghubir has determined in new research that monitoring several small bills and coins is more vexing to people than keeping track of fewer, larger denominations.
In “What’s in Your Wallet? Psychophysical Biases in the Estimation of Money,” Professor Raghubir and her co-authors, Mario Capizzani of Spain’s IESE and Joydeep Srivastava of the University of Maryland’s business school, conducted four studies on the recall value of money. They found that in estimating the contents of one’s wallet, money is more difficult to recall, and recalled less accurately, the smaller the denomination and the more the number of units of any denomination. The authors call this a numerosity bias, to complement their earlier theory of a denomination bias, in which they described the tendency of people to spend smaller denominations more readily than larger ones.
Key to understanding how petty spending decisions are made, the authors write, is whether individuals’ inability to recall what they are carrying, especially if they have many smaller bills, makes them more likely to spend a specific amount of money. “Failures in self-control are more likely to occur when individuals’ monitoring and tracking capabilities are attenuated,” says Professor Raghubir. She has posited that individuals on a budget might strategically choose to receive money in larger denominations precisely because they intuitively understand that many smaller bills are harder to keep track of and thus easier to spend. The studies confirmed that people tend to inaccurately estimate what they are carrying if they have many small bills rather than a few large ones, evidence of how hard it is to recall – and thus monitor – a wad of cash.
“The research has important implications for resource valuation and allocation decisions,” the authors write, “and is likely to enhance our understanding of how individuals make these decisions.”
In “What’s in Your Wallet? Psychophysical Biases in the Estimation of Money,” Professor Raghubir and her co-authors, Mario Capizzani of Spain’s IESE and Joydeep Srivastava of the University of Maryland’s business school, conducted four studies on the recall value of money. They found that in estimating the contents of one’s wallet, money is more difficult to recall, and recalled less accurately, the smaller the denomination and the more the number of units of any denomination. The authors call this a numerosity bias, to complement their earlier theory of a denomination bias, in which they described the tendency of people to spend smaller denominations more readily than larger ones.
Key to understanding how petty spending decisions are made, the authors write, is whether individuals’ inability to recall what they are carrying, especially if they have many smaller bills, makes them more likely to spend a specific amount of money. “Failures in self-control are more likely to occur when individuals’ monitoring and tracking capabilities are attenuated,” says Professor Raghubir. She has posited that individuals on a budget might strategically choose to receive money in larger denominations precisely because they intuitively understand that many smaller bills are harder to keep track of and thus easier to spend. The studies confirmed that people tend to inaccurately estimate what they are carrying if they have many small bills rather than a few large ones, evidence of how hard it is to recall – and thus monitor – a wad of cash.
“The research has important implications for resource valuation and allocation decisions,” the authors write, “and is likely to enhance our understanding of how individuals make these decisions.”