Post No.: 0307
Continuing from Post No.: 0163, people tend to feel more ‘pain of paying’ when paying by cash rather than by card, casino chips or credits, and so people tend to find it easier to spend more when using cards, chips or credits. The less ‘pain of paying’, the easier we’ll find it to spend, and spend more. This is why casinos, video games and stores would rather us convert our cash into chips, into credits by any name other than regular currencies, and into vouchers. It creates a layer to remove us from psychologically recognising that it’s cash and thus should really be treated just like cash. It also makes it feel like these credits or coupons can only be exclusively used in these places too, and so most will. (They should be able to be converted or refunded back into cash, or at least traded on the market, even if you might receive slightly less than the face value.)
So, for most people, handing over a credit card to pay €600 is psychologically easier than handing over a wedge of €600 in cash. Chips in a casino are essentially money or cash, yet for being in chip form, we don’t tend to think of them as ordinary cash anymore but as ‘credits for gambling or playing’, thus making it easier for us to blow the entire stash away in a casino. Without regulations or sufficient market pressures objecting to them, online services often use ‘credits’ by one name or another in a similar way to make consumers not treat them as ordinary cash. ‘One-click ordering’ makes it less effortful or painful to purchase items too so we might act on our impulses more easily. All in all, people tend to spend more if they find it easier to.
We also feel more ‘pain of paying’ when the spending of money is tightly integrated with the consumption – microtransactions (individual charges per individual item, or receiving regular and/or instant feedback of one’s charges or balances whenever money is spent) feel worse than subscriptions, prepayments or invoices (where the consumption occurs separately in time before or after the actual moment of consumption, so not during). Prepaid sources (such as vouchers or a prepaid account) reduce the pain of paying even more than charging after the consumption (invoicing), although there’s a high pain of paying to load up a prepaid source in the first place if you’re the one doing it, unless it’s automatically done without your intervention (e.g. via direct debit) hence you’re insulated from thinking about those transactions each time. Overall, mentally divorcing the consumption from the payment (e.g. ‘buy now, pay later’ deals) makes us more likely to consume.
So if you want to make it easier for a customer to spend, and if you’re charging them after their consumption – consolidate multiple individual charges and present them all at once rather than present each individual charge straight after each individual unit of consumption. It tends to feel like we’re spending more if we need to pay for every song separately compared to if we pay for the entire music album in one single transaction, even if it happens to cost the same in both cases. If people had to pull out their wallets to pay for every single time they used a litre of water from the taps at home then they’d likely be more mindful of using less. Coin-operated energy meters can therefore reduce consumption (although those on pay-as-you-go meters tend to receive the worst deals for each unit of energy used, which needs to be factored in).
On the other paw, microtransactions can make people more likely to spend a little bit now, then a little bit later, or a little bit here, then a little bit there, and over time this can add up dramatically without people noticing any large, single transactions that stand out in the memory – and so microtransactions lend themselves to a gambling environment where players are seeking repeated doses of dopamine hits for repeated chances of potentially winning something big. This is something to watch out for as a consumer.
People tend to undervalue fixed costs over variable costs – so when certain items can only be purchased via prepayment (as fixed costs), those items will tend to be chosen more often than those that can only be purchased with cash at the point of each moment of consumption (variable costs). A high ‘pain of paying’ tends to decrease the enjoyment of an activity, whilst a low ‘pain of paying’ allows one to not think too much about the money during the consumption (e.g. a prepaid all-inclusive holiday). Also, keeping price structures simple, and not offering too much choice, makes the decision-making process easier, thus making people more likely to buy.
Having a mobile phone contract is essentially a prepayment plan – you can treat it as if the minutes, texts and data have been prepaid for each month, whether you use your full allowance each month or not. So understand that when we have contracts that have an ‘unlimited’ number of minutes, texts and/or data included – these aren’t free. These should be counted as already paid for by the cost of paying the ongoing contract, whether you use any minutes, texts or data that month or not. Therefore the better language when making a call with such a contract is not that the call is ‘free’ but ‘included’ or ‘already paid for’ (and do watch out for any ‘fair usage’ policies and penalties too, which don’t quite make them ‘unlimited’ at all!) This difference in perspective may make you recognise whether you make enough calls, texts and/or use enough data to warrant paying for your current contract. In other words, even though you don’t need to worry about how many calls, texts or how much data you’re using on these contracts – it’s still worth knowing how much you are. Without you needing to change your call, text or data usage habits, there could be a cheaper contract out there for you?
Paying taxes or money into a pension fund is psychologically easiest to do when they’re automatically paid in and we never get hold of that money from our salaries in the first place, rather than if we receive the money into our bank accounts and then have to pay out from that. (There are also tax benefits for paying into pensions, as long as we live long enough to reap them.) So in this case, pay-as-you-earn (PAYE) tax mechanisms make it easier to pay our taxes than self-assessments, where practical.
‘Mental accounting’ is about assigning money to mental categories. For example, losing a €100 theatre ticket and then replacing it will make the ticket feel like it cost €200 and may affect your enjoyment of the show, whilst losing €100 in a separate incident will not affect your enjoyment of the show because it’d feel totally unrelated – even though it’s €100 lost all the same. Pre-budgeted money in an assigned category is easier to spend. For example, if you gave yourself €50 to spend on clothes this week, then spending all that €50 on clothes this week will have a very low pain of paying.
We tend to treat assigned and unassigned money differently – even though money is fungible, it isn’t always treated that way. Therefore, when considering the purchase of, say, a luxury item – don’t just think about what other luxury items you could get for that money but what other items or services in general you could get for the same money?
Therefore don’t frame things too narrowly! Savings seem mentally separate to loans, but it’s all money going in or out of ultimately the same pot of ‘your money’. Saving and borrowing should not be seen as separate but along the same axis i.e. there’s no point in simultaneously saving and borrowing if the rate of interest for borrowing is higher than for saving, which it normally is, thus it’s typically better to pay off your debts before trying to save, and to pay your highest-interest debts off first too.
However, it’s worth clarifying that not all debt is bad – ‘good debt’ invests in the furry future or serves an ongoing benefit or net return (such as borrowing to fund a higher education) and the repayments are affordable, whilst ‘bad debt’ is the opposite. ‘Manageable debt’ is debt that one can keep on top of, such as a loan that one can afford to keep up the repayments for. If a debt is unmanageable or bad then it can become a problem debt. Also, you might want to keep saved, say, 6 months of living costs in case of a rainy period, if your debts are manageable. (Please seek independent advice from a non-profit citizens advice charity in your country or area if you have any specific debt worries though.)
Don’t just think about what you gain but also what you lose. A high-salary job could be in a high-living-costs place, or a low-salary job could be in a low-living-costs place? We win some and lose some so don’t focus too narrowly on particular gains or losses, or particular stocks, shares or investments i.e. look at the bigger picture or broader frame.
Mental accounting can make it easier to manage your money and spending though. Nevertheless, it helps to take the bigger-picture view and understand that saving a bit here can allow you to spend a bit more elsewhere, and that your overall net balance is the most important figure at the end of the day (taking into account relatively liquid (e.g. cash) and non-liquid (e.g. property) assets regarding cash flow, because you could be asset-rich but cash-poor, which will affect how you’ll manage to currently live).
Taking advantage of all these effects – it’s best to distribute good news in separate chunks (e.g. wrap individual presents individually, even if they’re all going to the same person) and it’s best to clump bad news together (e.g. where legally allowable, only give an overall price and don’t itemise individual item costs). To a rational person, it shouldn’t matter how things are presented. People should care about the plain facts rather than their presentation, just like we should care about a person’s arguments rather than his/her charisma.
…But humans are, innately at least, not rational creatures!