What’s in Your Wallet? Psychophysical Biases in the Estimation of Money

Abstract

The denomination effect (Raghubir and Srivastava 2009) suggests that individuals are less likely to spend a specific amount of money when it is represented by a single large denomination (e.g., a $10 bill) relative to many smaller denominations (e.g., ten $1 bills). This research explores the idea that consumers are reluctant to break large bills because smaller denominations are less easy to monitor and keep track of relative to larger denominations. This increases the likelihood of spending with smaller denominations. A series of four studies suggest that in estimating the contents of one's wallet, money is more difficult to recall, and recalled less accurately the smaller the denomination, and more the number of units of any denomination. Study 1 demonstrates the biases in recall in a simple memory-based task, study 2 adds a stimulus-based task, study 3 explores the effect of motivation to be accurate and task difficulty, and study 4 links the biases in recall to actual spending. We develop a descriptive psychophysical model of how individuals estimate the money they are carrying and fit the model using the data from the four studies. Together, the findings provide evidence for a numerosity bias, where a larger number of units of a denomination are less accurately recalled compared to a fewer number of units; and a denomination bias, where smaller denominations are recalled less accurately as compared to larger denominations.

Price-Denomination Effect: Choosing to Pay With Denominations That Are the Same as the Product Prices

“…Finally, our theory and supporting evidence are in line with the mental accounting perspective ( Thaler, 1985 ; Prelec and Simester, 2001 ): consumers will use small denominations when prices are equal to the small denominations at hand, and large denominations for large purchases priced the same as the larger denomination. Our findings specifically add to the literature on the “denomination effect” ( Raghubir and Srivastava, 2009 ) which suggested that one of the reasons people were more likely to make a purchase when they held smaller denominations was because they wanted to exert self-control and did not want to lose track of how much money they had (see also Raghubir et al, 2017 ). Other reasons proposed for the same effect include perceptual fluency ( Mishra et al, 2006 ), and feelings of smaller notes being “dirty” as they are in greater circulation than larger notes ( Di Muro and Noseworthy, 2013 ).…”

“…One of the limitations of our empirical work is that, for the most part, it assumes that consumers are aware of the bills they carry in their wallet. However, there are systematic biases in the recall of denominations held in one's wallet that favor the recall of fewer larger denominations over the more numerous smaller ones (Raghubir et al, 2017). This opens up interesting lines of future work.…”

Age is positively associated with fading affect bias: A cross-sectional comparison.

“…The phenomenon has been demonstrated in children as well as adults (Rollins et al, 2018), occurs for dreams (T. D. Ritchie & Skowronski, 2008), personal event memories (e.g., Walker et al, 1997), interpersonal (Crawford, Hammond, & Marsh, 2023; Zengel et al, 2019) and intergroup interactions (Birtel et al, 2021), and for experiences of services and brands (Kim & Jang, 2014; Raghubir & Latimer, 2013). FAB is considered a “pan-cultural” phenomenon found in both collectivist and individualist cultures (Bond et al, 2016, 2022; T.…”

Vertical line extensions: consumers' preferences for downward and upward extensions

“…, 1996; Chen et al. , 1998; Raghubir and Corfman, 1995), setting unit pricing for different package sizes of the same brand (Shirai and Satomura, 2021), engaging in cause-related marketing (Dean, 2003), sponsoring sports and social messages (Szykman et al. , 2004; Woisetschläger, 2017) and launching brand extensions (Kardes and Allen, 1991).…”