Blog Post #4: The Psychology of Spending
Is it possible that we tend to spend more money with a credit card than with cash? This is a theory that people tend to hesitate more when spending with cash, as they can see the physical money leaving their hands, whereas credit cards are just a simple transaction. According to an article titled, “People Are Twice As Likely To Spend More Money When Using Card Than Cash”, 58% of people said card payments make them spend more money, and 70% of people prefer using a card to pay rather than cash. The article then concludes that it is clear that “digital payments are not just a convenience but an integral part of daily life, influencing how people interact with money and how businesses cater to their customers.”
Interestingly, people don’t only make more purchases with credit cards. They also tend to buy things that are higher in price, give into impulse buying, and tip more, too. An MIT Sloan School of Management study looked deep into the human brain and watched how it reacted after people make payments on credit cards versus cash. This study used fMRI technology to study brain activity the moment participants made a purchase, and found that the “reward region” of the brain, the striatum (the area that releases dopamine) is more reactive when making purchases from credit cards. This phenomenon shows how purchasing with credit cards is almost an addictive process, reducing the pain of paying for various items. This is the primary reason why credit cards drive spending.
The pain of paying theory refers to how spending money incentivizes negative emotions because it feels like a loss. This is the psychology behind spending on credit cards versus cash. Paying with credit cards hurts less because it is a less visible payment, and a more delayed, abstract loss, and mobile payments are even less painful as money is more abstracted. This is the danger of credit cards, as it can drive you to impulse spending, and buying things that are over your budget, which you will regret later.
However, in the modern day, you’ll almost never see people pay in cash anymore because of how convenient mobile and card payments are. Moreover, money is much safer when you don’t have to carry all of it around in cash. So, there are benefits to card and mobile payments, but it is crucial to be wary of the way they are designed to make us spend more.
