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

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  • Priya Raghubir
  • Mario Capizzani
  • Joydeep Srivastava

Abstract

The 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 using the data from the four studies. The findings suggest a numerosity bias, where a larger (vs. smaller) number of units of a denomination are less accurately recalled; and a denomination bias, where smaller (vs. larger) denominations are recalled less accurately.

Suggested Citation

  • Priya Raghubir & Mario Capizzani & Joydeep Srivastava, 2017. "What’s in Your Wallet? Psychophysical Biases in the Estimation of Money," Journal of the Association for Consumer Research, University of Chicago Press, vol. 2(1), pages 105-122.
  • Handle: RePEc:ucp:jacres:doi:10.1086/689867
    DOI: 10.1086/689867
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    References listed on IDEAS

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    1. Raghubir, Priya & Srivastava, Joydeep, 2002. "Effect of Face Value on Product Valuation in Foreign Currencies," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 29(3), pages 335-347, December.
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    3. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    4. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    5. Drazen Prelec & George Loewenstein, 1998. "The Red and the Black: Mental Accounting of Savings and Debt," Marketing Science, INFORMS, vol. 17(1), pages 4-28.
    6. Raghubir, Priya & Morwitz, Vicki G. & Santana, Shelle, 2012. "Europoly Money: How Do Tourists Convert Foreign Currencies to Make Spending Decisions?," Journal of Retailing, Elsevier, vol. 88(1), pages 7-19.
    7. Himanshu Mishra & Arul Mishra & Dhananjay Nayakankuppam, 2006. "Money: A Bias for the Whole," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 32(4), pages 541-549, March.
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