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

Abstract

AbstractThe denomination effect (Raghubir and Srivastava 2009) suggests that individuals are less likely to spend when money is in the form of a single large denomination (e.g., a $10 bill) relative to many smaller denominations (e.g., ten $1 bills). We explore 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. 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. Study 1 demonstrates the biases in a memory-based task, study 2 adds a stimulus-based task, study 3 explores the effect of accuracy motivation and task difficulty, and study 4 links the biases to actual spending. We develop a descriptive psychophysical model of how individuals estimate contents of their wallet and fit the model ...