The Urge to Splurge with Plastic NYT article

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The Urge to Splurge with Plastic NYT article

Post by Wildebeest »

I enjoyed this article: http://www.nytimes.com/2016/03/27/your- ... .html?_r=0 Probably because it feeds my confirmation bias.

I was astounded though that MBA students from M.I.T. are willing to pay twice as much for the same basketball tickets with credit cards as with cash.

I typically carry three credit cards and use the Costco AmEx exclusively ( till I get my new Costco Citi card in the mail and then I will only carry one) and have $ 100-$ 200 cash in my wallet and pay in cash for everything under $50 unless it is for gas or in a restaurant. I hate to leave a cc trail as to my buying habits.

Does the article make me change my ways?

It should, but probably not. It is scary that credit cards logos have conditioned us to spend more.
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Re: The Urge to Splurge with Plastic NYT article

Post by Traveler »

I suppose I'm far from the typical consumer but these social studies don't make sense to me. If I'm willing to pay $50 for a Red Sox game, it doesn't matter to me the method in which I pay it. I equate the cost the same no matter what. I'm shocked that apparently educated people can't figure this out and are willing to pay double for the privilege of using a credit card. I hope these MBAs aren't in banking.
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Re: The Urge to Splurge with Plastic NYT article

Post by RosieQ »

And with credit card you can get 1-5% back for most of your purchases.
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Re: The Urge to Splurge with Plastic NYT article

Post by VictoriaF »

The article is believable; several different studies have established that people treat cash differently than substitutes. For example, students were more likely to lie about their test completion scores when they were given tokens than when they were given cash. The tokens were exchanged for cash at another table a few feet away.

In another study, people paying with plastic (credit or debit cards) were buying more junk in the line leading to a cash register.

We all are prone to claim exception from silly behaviors, but in actuality we all are vulnerable to cognitive biases. No one wants to admit to being influenced by advertisement or credit; unfortunately, we all do. Credit card perqs and bonuses are particularly insidious. Not only we spend more to meet minimum spending bonuses but we also use the cards more freely, justifying it by point earnings.

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Re: The Urge to Splurge with Plastic NYT article

Post by Jacotus »

A closely related, well-known psychological effect is the endowment effect.
Wikipedia wrote:One of the most famous examples of the endowment effect in the literature is from a study by Daniel Kahneman, Jack Knetsch & Richard Thaler,[4] in which participants were given a mug and then offered the chance to sell it or trade it for an equally valued alternative (pens). They found that the amount participants required as compensation for the mug once their ownership of the mug had been established ("willingness to accept") was approximately twice as high as the amount they were willing to pay to acquire the mug ("willingness to pay").
It's interesting that the same factor of ~2 appears in this example and in OP's. Forking over dollar bills in your hand makes them feel more valuable. This phenomenon puts a different spin on the urging of companies to move to a cashless society. It's not just about convenience for the customer, but for increased spending overall!

On the other hand, it's intriguing to think about the possibility that credit cards eliminate the cognitive distortion caused by the endowment effect of using cash. What if the amount people spend when using credit cards as opposed to cash is closer to their "true" rational valuation of goods and services? Does this matter?
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Re: The Urge to Splurge with Plastic NYT article

Post by VictoriaF »

Jacotus wrote:A closely related, well-known psychological effect is the endowment effect.
Wikipedia wrote:One of the most famous examples of the endowment effect in the literature is from a study by Daniel Kahneman, Jack Knetsch & Richard Thaler,[4] in which participants were given a mug and then offered the chance to sell it or trade it for an equally valued alternative (pens). They found that the amount participants required as compensation for the mug once their ownership of the mug had been established ("willingness to accept") was approximately twice as high as the amount they were willing to pay to acquire the mug ("willingness to pay").
It's interesting that the same factor of ~2 appears in this example and in OP's. Forking over dollar bills in your hand makes them feel more valuable. This phenomenon puts a different spin on the urging of companies to move to a cashless society. It's not just about convenience for the customer, but for increased spending overall!

On the other hand, it's intriguing to think about the possibility that credit cards eliminate the cognitive distortion caused by the endowment effect of using cash. What if the amount people spend when using credit cards as opposed to cash is closer to their "true" rational valuation of goods and services? Does this matter?
The endowment effect applies to the things intended for the personal consumption, not those intended for trade. For example, if you have bought a pair of shoes, or even contemplate buying a pair of shoes, you develop endowment effect with respect to that pair of shoes. But if you are a shoe merchant, you don't get attached to your inventory; you want it to be sold as fast as possible.

Thus, while paper currency and plastic (electronic, and other) payments are treated differently in one's mind, the mechanism is different than the endowment effect. One factor could be Just Noticeable Difference (JND). If you have $100 in your wallet, $5 is noticeable; if you have $10,000 spending limit on your credit card, $5 is below the JND.

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Re: The Urge to Splurge with Plastic NYT article

Post by mickeyd »

Evidently attendance at MIT does not insure that the MBA student is blessed with common sense.
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Re: The Urge to Splurge with Plastic NYT article

Post by VictoriaF »

mickeyd wrote:Evidently attendance at MIT does not insure that the MBA student is blessed with common sense.
The phenomenon described in the article has nothing to do with the presence or absence of common sense. It's about cognitive biases that affect everyone.

Please note that there is a principal difference between:
- within-subject experiments
and
- between-subject experiments.

In the case described in the article they did not ask the same people how much they would pay with cash vs. how much they would pay with credit. They used two groups of different people, and asked one group about cash and the other group about credit.

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Re: The Urge to Splurge with Plastic NYT article

Post by stoptothink »

Traveler wrote:I suppose I'm far from the typical consumer but these social studies don't make sense to me. If I'm willing to pay $50 for a Red Sox game, it doesn't matter to me the method in which I pay it. I equate the cost the same no matter what. I'm shocked that apparently educated people can't figure this out and are willing to pay double for the privilege of using a credit card. I hope these MBAs aren't in banking.
They make absolutely zero sense to me either, but I can't deny that for most people it is the case. I guess I should be thankful for this behavioral economics phenomenon because those of us who are able to use credit responsibly reap the rewards.
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Re: The Urge to Splurge with Plastic NYT article

Post by bs010101 »

Traveler wrote:I suppose I'm far from the typical consumer but these social studies don't make sense to me. If I'm willing to pay $50 for a Red Sox game, it doesn't matter to me the method in which I pay it. I equate the cost the same no matter what. I'm shocked that apparently educated people can't figure this out and are willing to pay double for the privilege of using a credit card. I hope these MBAs aren't in banking.
Allow me to paraphrase (and, sorry to pick on you, but it's a fairly common perspective on this forum): "I'm shocked that apparently educated people are exhibiting behavioral biases. I, as a perfectly rational economic man, never exhibit such biases and always trade money for the exactly equivalent amount of marginal utility." Someone who claims that is ironically displaying the overconfidence behavioral bias. The whole field of behavioral economics is based on the fact that real-life people don't act rationally. Therefore we need to develop systems or practices to control our behavioral biases, as well as be aware of those biases so we can work to counteract them.
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Re: The Urge to Splurge with Plastic NYT article

Post by nisiprius »

bs010101 wrote:...Allow me to paraphrase (and, sorry to pick on you, but it's a fairly common perspective on this forum): "I'm shocked that apparently educated people are exhibiting behavioral biases. I, as a perfectly rational economic man, never exhibit such biases and always trade money for the exactly equivalent amount of marginal utility." Someone who claims that is ironically displaying the overconfidence behavioral bias...
I agree. And I, for one, am constantly seeing examples of my own behavioral biases. Unfortunately, for every one that I see, there are probably a dozen I don't see.

I find it totally convincing that people spend more when they use credit cards. One of the bizarre behavioral things my wife and I have both noticed is that there's even a difference between using credit cards and ATM cards, and one of the ways this shows up is that we keep roughly accurate mental accounting of our cash and debit card expenditures, and can usually guess or checking account balance fairly closely--but are always surprised by how big our credit card balance is when we pay it at the end of the month.

There's no mystery to this. The less what you are spending looks and feels like money, the less awareness and financial discomfort it gives you to spend it.

And I don't think there's any mystery to the idea that a teeny tiny cashback amount is enough to change your feelings from discomfort at spending money to a glow of earning cashback rewards... a glow that is all out of proportion to the actual number of dollars being saved.

Incidentally, I forget which behavioral economist it was who said that a common reaction from his traditional-economist colleagues to behavioral economics experiments was to object that the subjects used must have been really dumb.
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Re: The Urge to Splurge with Plastic NYT article

Post by patrick »

bs010101 wrote:
Traveler wrote:I suppose I'm far from the typical consumer but these social studies don't make sense to me. If I'm willing to pay $50 for a Red Sox game, it doesn't matter to me the method in which I pay it. I equate the cost the same no matter what. I'm shocked that apparently educated people can't figure this out and are willing to pay double for the privilege of using a credit card. I hope these MBAs aren't in banking.
Allow me to paraphrase (and, sorry to pick on you, but it's a fairly common perspective on this forum): "I'm shocked that apparently educated people are exhibiting behavioral biases. I, as a perfectly rational economic man, never exhibit such biases and always trade money for the exactly equivalent amount of marginal utility." Someone who claims that is ironically displaying the overconfidence behavioral bias. The whole field of behavioral economics is based on the fact that real-life people don't act rationally. Therefore we need to develop systems or practices to control our behavioral biases, as well as be aware of those biases so we can work to counteract them.
Is every claim by someone on this forum to be different than average to be treated this way no matter what? For instance, I read somewhere that average people in their 60s have only 172K in retirement savings. If a forum poster here claims to have more than that, is it overconfidence bias convincing the poster to assume they are better than everyone else, even though their balance really is only average?

I'll assume not. Note that many people here have much more than the recommend amount of savings. Perhaps it would be best for us to stick with credit card to avoid the danger of underspending that our biases would cause if we used cash.
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Re: The Urge to Splurge with Plastic NYT article

Post by livesoft »

The linked article is found in a special section of the NYTimes about psychological/behavioral stuff and money:
http://www.nytimes.com/issue/your-money ... your-money

So there are other articles to read to get your jollies. I like the one written by Belsky which is a good rehash for folks who cannot read a book.
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Re: The Urge to Splurge with Plastic NYT article

Post by bs010101 »

patrick wrote:
bs010101 wrote:
Traveler wrote:I suppose I'm far from the typical consumer but these social studies don't make sense to me. If I'm willing to pay $50 for a Red Sox game, it doesn't matter to me the method in which I pay it. I equate the cost the same no matter what. I'm shocked that apparently educated people can't figure this out and are willing to pay double for the privilege of using a credit card. I hope these MBAs aren't in banking.
Allow me to paraphrase (and, sorry to pick on you, but it's a fairly common perspective on this forum): "I'm shocked that apparently educated people are exhibiting behavioral biases. I, as a perfectly rational economic man, never exhibit such biases and always trade money for the exactly equivalent amount of marginal utility." Someone who claims that is ironically displaying the overconfidence behavioral bias. The whole field of behavioral economics is based on the fact that real-life people don't act rationally. Therefore we need to develop systems or practices to control our behavioral biases, as well as be aware of those biases so we can work to counteract them.
Is every claim by someone on this forum to be different than average to be treated this way no matter what? For instance, I read somewhere that average people in their 60s have only 172K in retirement savings. If a forum poster here claims to have more than that, is it overconfidence bias convincing the poster to assume they are better than everyone else, even though their balance really is only average?
No - account balances are easily provable, and if it's above average, it's above average. It is a lot harder to prove you don't have a behavioral bias. You might be able to conduct a controlled experiment - like switching between cash only and credit card only over various time periods, controlling for seasonal spending and other factors, but I think it would be hard to prove convincingly with a sample size of one.
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Re: The Urge to Splurge with Plastic NYT article

Post by VictoriaF »

nisiprius wrote:
bs010101 wrote:...Allow me to paraphrase (and, sorry to pick on you, but it's a fairly common perspective on this forum): "I'm shocked that apparently educated people are exhibiting behavioral biases. I, as a perfectly rational economic man, never exhibit such biases and always trade money for the exactly equivalent amount of marginal utility." Someone who claims that is ironically displaying the overconfidence behavioral bias...
I agree. And I, for one, am constantly seeing examples of my own behavioral biases. Unfortunately, for every one that I see, there are probably a dozen I don't see.

I find it totally convincing that people spend more when they use credit cards. One of the bizarre behavioral things my wife and I have both noticed is that there's even a difference between using credit cards and ATM cards, and one of the ways this shows up is that we keep roughly accurate mental accounting of our cash and debit card expenditures, and can usually guess or checking account balance fairly closely--but are always surprised by how big our credit card balance is when we pay it at the end of the month.

There's no mystery to this. The less what you are spending looks and feels like money, the less awareness and financial discomfort it gives you to spend it.
My cognitive bias example is lodgings. When I stay in a hotel and pay with a credit card, I don't distinguish between a $130 room and $140 room. When I stay in hostels, $35 rooms and $40 rooms look the same to me.

However, last year I walked the Camino de Santiago where I stayed at public albergues for 42 nights, every night in a new place. Public albergues accepted cash only, and I paid prices ranging from 5EUR to 10EUR. I distinctly remember a couple cases when I passed an 8EUR albergue to reach a 6EUR one.

It's not that I spend more with VISA. It's that I spend less with cash.
/
/
nisiprius wrote:And I don't think there's any mystery to the idea that a teeny tiny cashback amount is enough to change your feelings from discomfort at spending money to a glow of earning cashback rewards... a glow that is all out of proportion to the actual number of dollars being saved.
Another behavioral economics finding is that people react to the quantities of good or bad things, not to their magnitudes. It's preferable to get good things in many small installments and bad things in single large ones.

Thus, I am getting this glow when I use credit cards earning bonuses, even when the bonuses are small.
nisiprius wrote:Incidentally, I forget which behavioral economist it was who said that a common reaction from his traditional-economist colleagues to behavioral economics experiments was to object that the subjects used must have been really dumb.
It could be Thaler in his recent book Misbehaving.

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Re: The Urge to Splurge with Plastic NYT article

Post by VictoriaF »

bs010101 wrote:
patrick wrote:
bs010101 wrote:
Traveler wrote:I suppose I'm far from the typical consumer but these social studies don't make sense to me. If I'm willing to pay $50 for a Red Sox game, it doesn't matter to me the method in which I pay it. I equate the cost the same no matter what. I'm shocked that apparently educated people can't figure this out and are willing to pay double for the privilege of using a credit card. I hope these MBAs aren't in banking.
Allow me to paraphrase (and, sorry to pick on you, but it's a fairly common perspective on this forum): "I'm shocked that apparently educated people are exhibiting behavioral biases. I, as a perfectly rational economic man, never exhibit such biases and always trade money for the exactly equivalent amount of marginal utility." Someone who claims that is ironically displaying the overconfidence behavioral bias. The whole field of behavioral economics is based on the fact that real-life people don't act rationally. Therefore we need to develop systems or practices to control our behavioral biases, as well as be aware of those biases so we can work to counteract them.
Is every claim by someone on this forum to be different than average to be treated this way no matter what? For instance, I read somewhere that average people in their 60s have only 172K in retirement savings. If a forum poster here claims to have more than that, is it overconfidence bias convincing the poster to assume they are better than everyone else, even though their balance really is only average?
No - account balances are easily provable, and if it's above average, it's above average. It is a lot harder to prove you don't have a behavioral bias. You might be able to conduct a controlled experiment - like switching between cash only and credit card only over various time periods, controlling for seasonal spending and other factors, but I think it would be hard to prove convincingly with a sample size of one.
I would take it further. Everyone has cognitive biases, but in different individuals different biases are expressed to a different extent. Some biases may be less pronounced in individuals on the autistic spectrum. Other individuals may have developed strategies and habits to control some of their biases. Kahneman recommends water-cooler conversations about cognitive biases, because when people expect that their biases may be exposed they pay more attention.

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Re: The Urge to Splurge with Plastic NYT article

Post by letsgobobby »

These studies all have the same bias, namely that cash is somehow pure money and credit cards are perversions and the perversity costs money and efficiency.

But what is money?

I have not used cash as a primary form of money in 25 years. I often have none with me. I believe many in my generation are the same. Comparing my spending habits credit vs cash when I hardly even know what cash is... that is not a valid comparison.

If I spent in cowrie shells I also might hoard those, because I do not know how to value them or what they can do for me. That does not make cowrie shells more efficient, even to me the consumer.

The consumer protection, convenience, and record keeping benefits of credit cards are substantial and should not be dismissed out of hand. A small cost in exchange for those benefits is reasonable.
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Re: The Urge to Splurge with Plastic NYT article

Post by awval999 »

I think this is generational. If I have paper cash I think of it as "free money" and spend it frivolously. I typically only have currency on vacations. While when I swipe my credit card I think of it as real money because I excel spreadsheet my bills and update them constantly.

If you ask a random millennial they probably can't even tell you the last time they had $100 on their person. Mine would either be last time I went to a casino, or during a vacation in a foreign country.
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Re: The Urge to Splurge with Plastic NYT article

Post by VictoriaF »

letsgobobby wrote:These studies all have the same bias, namely that cash is somehow pure money and credit cards are perversions and the perversity costs money and efficiency.
Behavioral economists are economists, they don't and wouldn't call plastic "perverse." But what they have uncovered was that the farther away is one from the money, the less careful he is with money equivalents. When Ariely put beer in shared refrigerators in college dorms, it has disappeared within a day. But when he put plates with a few dollars in other refrigerators, no one took them. People respect banknotes, they did not respect goods of the equivalent value the same way.
letsgobobby wrote:But what is money?
Money is a medium of exchange, a unit of account, and a store of value. Before paper money, there were coins. Before that, there were small rocks. When money were larger and heavier, people were even more careful with them than they are now with paper money.

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Re: The Urge to Splurge with Plastic NYT article

Post by INDUBITABLY »

livesoft wrote:The linked article is found in a special section of the NYTimes about psychological/behavioral stuff and money:
http://www.nytimes.com/issue/your-money ... your-money

So there are other articles to read to get your jollies. I like the one written by Belsky which is a good rehash for folks who cannot read a book.
livesoft, that reminds me, I picked up his book at the library after stumbling across one of your posts recommending it the other day. I hadn't read anything about behavioral economics before and it is fascinating. Thank you for that!
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Re: The Urge to Splurge with Plastic NYT article

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awval999 wrote:I think this is generational. If I have paper cash I think of it as "free money" and spend it frivolously. I typically only have currency on vacations. While when I swipe my credit card I think of it as real money because I excel spreadsheet my bills and update them constantly.

If you ask a random millennial they probably can't even tell you the last time they had $100 on their person. Mine would either be last time I went to a casino, or during a vacation in a foreign country.
The OP article describes experiments with college students; they are millennials.

It's true that the millennials are more distant from cash than earlier generations. But it does not mean that they are more careful with their Apple Pay or Bitcoins. It means that new technologies and new conveniences lead people to higher spending.

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Re: The Urge to Splurge with Plastic NYT article

Post by Fallible »

I think it's well documented that people spend more with a card. The only question is how much more, and I'm not aware of any study or research on that.
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Re: The Urge to Splurge with Plastic NYT article

Post by patrick »

VictoriaF wrote: The OP article describes experiments with college students; they are millennials.

It's true that the millennials are more distant from cash than earlier generations. But it does not mean that they are more careful with their Apple Pay or Bitcoins. It means that new technologies and new conveniences lead people to higher spending.

Victoria
The article is recent but some (perhaps all) of the experiments are old. The study with the basketball ticket auction was published in 2000, and used MBA students (who are older than undergraduates) so its participants were too old to be millenials.
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Re: The Urge to Splurge with Plastic NYT article

Post by patrick »

The studies mentioned in this article (along with most other research I've seen regarding spending behavior) focus on relatively small purchases. Spending less on food and trinkets due to using cash may provide some benefits, but those are relatively cheap things anyway. Housing, cars, college education, and health care tend to be much more significant expenses. The studies don't say what would happen if people had to pay for those things with cash only, though the results might well be interesting.
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Re: The Urge to Splurge with Plastic NYT article

Post by Wildebeest »

patrick wrote:The studies mentioned in this article (along with most other research I've seen regarding spending behavior) focus on relatively small purchases. Spending less on food and trinkets due to using cash may provide some benefits, but those are relatively cheap things anyway. Housing, cars, college education, and health care tend to be much more significant expenses. The studies don't say what would happen if people had to pay for those things with cash only, though the results might well be interesting.
I agree. I would love to know more.

I do feel I have a bull's eye on my back, that I get unrequited offers for $ 100,000 signature loans and with a debit card attached ( however not activated yet but "guaranteed" that I will be approved with in 72 hours).

I tried to buy my car with the AMEX Fidelity card.
The dealer only allowed $ 3000 on the credit card.

We have tried to charge large business expenses to cash back credit cards, but vendors will not accept it ( especially the cost of AMEX is prohibitive for the vendors).
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Re: The Urge to Splurge with Plastic NYT article

Post by The Wizard »

I'm sure that many people spend more with CCs that with cash, even with today's easy ATM access.
But does EVERYBODY follow this pattern?
I would think not.

I would note further that some low budget places, like my favorite Chinese lunch truck, take only cash for a $5.75 lunch. Whereas sit-down places that take CCs are unlikely to have a bill less than that amount.

So economic researchers who have an agenda can usually find a way to "prove" it, I would think...
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Re: The Urge to Splurge with Plastic NYT article

Post by The Wizard »

Additionally, I buy a fair amount of stuff at Amazon (Prime).
It's unclear how one might pay their bill at Amazon.com with cash if they wanted to.

So I'm thinking the words antiquated and irrelevant might best apply to studies like this...
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Re: The Urge to Splurge with Plastic NYT article

Post by Toons »

Personally,
My spending "behavior with either cash or credit card is pretty much identical,
Besides,carrying around excess cash makes it more difficult to "fold my wallet".
Keep It Simple,

8-)
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Re: The Urge to Splurge with Plastic NYT article

Post by bs010101 »

Part of the effect might actually be the simplicity of using the credit card. I always read things from Google and Apple about making it easier to pay for things - like being able to pay by texting or waving your phone instead of all the effort of taking out your card and swiping it. I bet once that becomes common, people will spend even more with their phone than with credit cards. I also wonder who is asking for it to be made easier to pay - is it consumers or merchants?

Personally, I like for there to be some effort in buying things. I use LastPass, but don't use their feature for auto-filling credit cards. It's not because of security. It's because I like the fact that if I see something online that I want to buy, I have to go all the way downstairs, get my wallet, go back upstairs, type in the credit card number, then go back downstairs to put away my wallet so I can find it in the morning. Half the time I decide it's not worth the trouble, and therefore spend less.

With cash, I bet the effect is similar - sometimes you don't have enough money in your wallet to buy things, so you don't buy them. That never happens with credit cards, so you spend more.
Last edited by bs010101 on Sun Mar 27, 2016 9:21 pm, edited 1 time in total.
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Re: The Urge to Splurge with Plastic NYT article

Post by Doom&Gloom »

The Wizard wrote:Additionally, I buy a fair amount of stuff at Amazon (Prime).
It's unclear how one might pay their bill at Amazon.com with cash if they wanted to.

So I'm thinking the words antiquated and irrelevant might best apply to studies like this...
Same here. I can't imagine that if I shopped exclusively locally with cash, that I could recoup the 5% cash-back and >7% sales tax that I save by buying selected items on Amazon. Maybe I wouldn't buy some things if I had to drive to get them, but if I did, my travel costs would increase the costs of those items--if I could even find them.

Experimental studies using simulated situations with broke college students or even grad students are nice, as are analyses of non-experimental data in the "real world," but the conclusions are certainly better applied to large groups than they are to individuals.
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Re: The Urge to Splurge with Plastic NYT article

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