The psychology of debit/credit cards
January 14, 2009 | Kansas City Star, alternatives, industry, personal finance | Comments (0)Very interesting column in the Kansas City Star:
My favorite text on behavioral finance is Why Smart People Make Big Money Mistakes. The authors write that credit/debit cards are mental accounts. There is no pain of loss when one pulls out the plastic. Two MIT marketing professors (Prelec and Simester) did a study several years ago to determine how behaviors change when cash is used to settle accounts as opposed to credit/debit cards. They asked students to bid competitively for tickets to a Boston Celtics game.
One group of students was told the tickets required cash purchase. The other group was allowed to bid with credit cards. The study then averaged all the submitted bids. The folks who used credit cards were willing to pay twice as much as the folks who had to part with cash. The seat the folks bought with credit was no closer to the action and the game was no more entertaining than for the folks who paid cash. This is the dangerous part of behavior.
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