When doing shopping have you ever thought why you find easier to shop with credit or a debit card than actual cash? Why is it much easier to spend with plastic money?
You will get answer for your question in a concept called mental accounting, a term coined by Richard Thaller, a pioneer of behavioral economics.
According to Thaller the term can be defined as “the inclination to categorize and treat money differently, depending on where it comes from, where it is kept and how it is spent.”
As Gary Belsky and Thomas Gilovich mentioned in their book, Why Smart People Make Big Money Mistakes and How to Correct Them, “In fact, credit cards and other types of revolving loans are almost by definition mental accounts, and dangerous ones at that. Credit card dollars are cheapened because there is seemingly no loss at the moment during the purchase, at least on a visceral level. Think of it this way: If you have $100 cash in your pocket and you pay $50 for a toaster, you experience the purchase as cutting your pocket money in half. If you charge that toaster though, you don’t experience the same loss of buying power that your wallet of $50 brings.”
In other words spending cash to buy things give more pain to individuals. “In fact, the money we charge on plastic is devalued because it seems as if we’re not actually spending anything when we use cards. Sort of like Monopoly money,” Belsky and Gilovich add.
But one thing that every card holder does not keep in mind is that money spent through a credit card is more expensive in case of failure to repay the amount during the credit period because high interest is charged for on the payments.
Moreover, individuals paying with credit card cannot see the money they are spending so they end up spending more. As Belky and Gilovich point out, “But you may be surprised to learn that by using credit cards, you not only increase your chances of spending to begin with, you also increase the likelihood that you will pay more when you spend than you would if you were paying cash.”
Therefore next time going for shopping and do not have enough money leave the credit card at home pay shopping bills in cash.
Posts
