The denomination effect in consumer spending behaviour.
Serina had just got off her train to London on the normal weekday commute. Once arriving in London on the way to her office she always stopped at a local supermarket to buy her lunch for later in the day. Serina enjoyed trying different foods from the deli counter. Today she picked up her lunch headed to the cashier and searched around in the bag for some change, she disliked having loss change so preferred to get rid of it whenever possible. Serina found a £10 note and about £10 in coins, she picked up a little snack, payed with the coins and continued on to work. Like most of us Serina spent any coins she had before breaking into a new note.
The study of decision-making and spending behaviour is important because in the long-term, over the course of a year or years, spending a little less (or more) money every day can have a big impact on our finances. One of the spending behaviours that most of us don’t think about, but still do, is that we prefer to spend coins more than notes (bills in the U.S.). The denomination effect suggests that when an individual possess two equal amounts of money we are more likely to spend the smaller denominations (e.g., 10 x £1 coins) then a larger denomination (e.g., a £10 note) (Raghubir & Srivastava, 2009; 2016). Furthermore, we evaluate transactions more positively when an identical amount of money is framed as “pennies a day” (e.g., £1 a day) rather than aggregately (e.g., £365 a year) (Gourville, 1998).
Although the denomination effect isn’t well known cognitive bias in the academic literature it has been studied extensively by its discoverers in series of experiments since its discovery in 2009 (Raghubir & Srivastava, 2009;2016). In the first study eighty-nine business student undergraduates were recruited from two U.S. universities, they were recruited to either a large denomination condition ($1 bill) or a small denomination condition (four quarters). Participants were given the choices of what sweets to the money on which consisted on sweets valued at 25 cents of a dollar each depending on the condition. Across the two conditions participants were more likely to spend when given four quarters than the $1 bill, which is consistent with the denomination effect. Despite the $1 bill not being a large bill, the denomination effect was still found.
The second study by Raghubir and Srivastava (2009) recruited seventy-five drivers at gas (petrol) stations in the Midwest of the U.S., they were asked to take part in a quick survey in which three questions were asked about fuel spending behaviour as a cover for the actual study. The drivers were given $5 in one of three forms; five $1 bills, five $1 coins, or a $5 bill. The different forms of $1 (coins or bills) allowed for a control. An important note here is that some participants choose to keep the $1 coins as souvenirs because of the rarity compared to bills. The drivers were then allowed to spend the money on whatever they wanted in the gas station shop with the condition that they provided the receipt and information about the manner of purchase (i.e., card or cash). Here, the researchers found evidence of the denomination effect – non-petrol related were higher for the five $1 bill group (at 24%) compared to the single $5 bill group (at 16%).
So, like Serina if you ever wonder why we tend to prefer to spend our low denomination money more than equal value high denomination money one explanation is the denomination effect. We tend to value lower denominations less then high denominations without paying a lot of attention as to why we do this. Perhaps next time you find yourself searching around for cash in your bag when at the shops beware that some of your spending habits may be driven by denomination effect.