What exactly is the effect of not handling your own money?

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InMSWeAntitrust
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What exactly is the effect of not handling your own money?

Postby InMSWeAntitrust » Sun Apr 18, 2010 12:14 am UTC

While contemplating my own personal finances, I came upon a startling revelation: I could not easily quantify my own financial resources in my own mind. Logging into online banking and seeing a balance of $1,000 is a factor of ten difference from seeing a balance of $10,000; yet I cannot quantify that difference without resorting to intermediate products, such as imagining how many months of rent that would cover, or how many of a certain product I would be able to purchase with those funds.

I considered it further and realized that it's because that number on the screen is still interpreted by my mind as simply a number instead of an amount. It is less than the number of stars in the sky but more than the number of presidents the U.S. has had--but it didn't quite click in my head any more that it represented dollar bills.

With credit/debit/checking cards just about reaching virtual ubiquity what, if any, is the effect of not being able to physically quantify one's financial resources? Is there a difference, mentally, between having ten thousand in the bank versus having ten thousand in your hand?

My personal hypothesis, drawn from my experience, is that there is a startling difference between holding cash and holding a single card, and it may help explain why people are so quick to buy on credit, overdraw their bank accounts, and take out bad loans, because after all it's still just a number to them.

Thoughts?

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Vaniver
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Re: What exactly is the effect of not handling your own mone

Postby Vaniver » Sun Apr 18, 2010 12:45 am UTC

Studies have shown people behave more conservatively with cash than with credit cards, so this is a general experience.

My guess as to why is because with cash you are forced to see the number as the composite of other numbers- a $24 meal is two 20s with three 5s and a one in change. A $240 purchase is twelve twenties- but when you look at 24 and 240, the trailing zero doesn't have the same effect as adding another ten bills to your hand. You also have a frequent reminder of the total- every time you open your wallet, you see how much money you have left for this time period. Whenever you make a purchase with your debit card, it doesn't remind you of what's left in your bank account, where every time you have to take out or put in a bill you get a reminder of how much cash you have.

As for the impact- increased consumption, decreased savings. How much of that general trend is due to this particular effect is up for grabs.
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psychosomaticism
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Re: What exactly is the effect of not handling your own mone

Postby psychosomaticism » Sun Apr 18, 2010 12:46 am UTC

I should think that you're correct, but only to a point. I don't believe humans are very capable of physically conceptualizing large amounts of anything above a certain point. Evolutionarily, there isn't much use to see the difference between 10 million grains and 11 million grains; both would be quantified as 'many'.

I believe I read a study on reflexive human counting ability (as opposed to counting each individual object) that said that when one was flashed a number of objects up to and including 5, it was easy to simply respond without cognitive input the number present. After five it took considerable processing power for larger increments. Unfortunately, I don't know the source of this info, nor do I know if it's scientific or anecdotal.

So in relation to your thinking about money, I don't think it would have any effect past a small quantity of money, as any large amount, present or abstract, wouldn't give different sensations other than 'large amount'. I'll concede that having physical money is different than virtual money (credit), and would have psychological effects in terms of immediately available funds, but I don't believe there's a difference in terms of how much one would perceive having.


...I think I made a point somewhere in there....

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Re: What exactly is the effect of not handling your own mone

Postby uncivlengr » Sun Apr 18, 2010 12:58 am UTC

Aboslutely - I paid for some groceries today with my credit card, as I always do, and I couldn't tell you if it cost $30 or $50, because I never bother looking at the price because I swipe the card and type my PIN the same either way.

I can tell you that a breakfast bagel and orange juice from the bagel place near my office costs $5.08, because they only take cash.

It's similar with anything in life - the further removed from whatever you're dealing with, the less you're able to have a full understanding of it.
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Re: What exactly is the effect of not handling your own mone

Postby PeterW » Sun Apr 18, 2010 1:00 am UTC

It could also be that the endowment effect kicks in slightly when you're handling money, but I don't see much of that effect when I use credit cards.

InMSWeAntitrust
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Re: What exactly is the effect of not handling your own mone

Postby InMSWeAntitrust » Sun Apr 18, 2010 1:06 am UTC

Vaniver wrote:As for the impact- increased consumption, decreased savings. How much of that general trend is due to this particular effect is up for grabs.


The impact is what I'm mostly concerned with. Is this something that only contributes to the current economic climate, or is it a major player? Could simple human tendencies be an underlying cause to the accumulation of so much debt?

psychosomaticism wrote:So in relation to your thinking about money, I don't think it would have any effect past a small quantity of money, as any large amount, present or abstract, wouldn't give different sensations other than 'large amount'. I'll concede that having physical money is different than virtual money (credit), and would have psychological effects in terms of immediately available funds, but I don't believe there's a difference in terms of how much one would perceive having.


So people with greater than $20,000 in the bank treat it the same, mentally, as someone with $2,000,000 in the bank? And they would all treat it the same if they instead had that amount in one room of their house?

And with uncivlengr's post, it is starting to become a little more clear that this might be a more prevalent phenomenon than is immediately apparent; armed with this knowledge, is this effect a small or a large one? Is it simply something that happens but is self-contained, or does it multiply over many accounts of millions of people and affect the societal and economic climate in an enormous fashion?
PeterW wrote:It could also be that the endowment effect kicks in slightly when you're handling money, but I don't see much of that effect when I use credit cards.


So could you quantify the amount of negative dollars you have in credit on any of your cards, at least in your head? The difference between owing $50 and $65 for instance, where $15 actually can equal 60 25 cent rings, for example?

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Re: What exactly is the effect of not handling your own mone

Postby PeterW » Sun Apr 18, 2010 7:57 am UTC

Well I just think that the tactile experience of handling money more closely resembles our evolutionary environment of dealing with physical goods, thus triggering our primitive biases like the endowment effect. Credit cards are more abstract, and not only do we lose our loss-aversion bias, we also have a distorting effect because we're not good at intuiting large numbers.

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Re: What exactly is the effect of not handling your own mone

Postby Zamfir » Sun Apr 18, 2010 11:11 am UTC

InMSWeAntitrust wrote:While contemplating my own personal finances, I came upon a startling revelation: I could not easily quantify my own financial resources in my own mind. Logging into online banking and seeing a balance of $1,000 is a factor of ten difference from seeing a balance of $10,000; yet I cannot quantify that difference without resorting to intermediate products, such as imagining how many months of rent that would cover, or how many of a certain product I would be able to purchase with those funds.


On the other hand, in what sense are 100 bills of a $100 meaningful to you, without some intermediate product step? And if you continuously carried $10,000 in your wallet instead of a debit card, would you really spend less? The effect has as much to do with large values vs small values, not just abstract vs physical money. You have many, many direct experiences with the value of $30 but much less with $3000.

Also, by splitting money into groups produces a tendency to give more equal attention to every group. So if you have a group of $10,000 in your account and a group of $30 in your wallet, you become much more aware of that $30 running out than if you had a single group of $10,030. Some people make budgets for that reason (amongst other reasons): $100 for food, $50 for entertainment, $50 for transport, and when a budget runs out you can always get more, you just have to give it some mental attention. That way you are much more aware of your expenditures, even when all the budgets are in the end the same bank account. Having cash in your wallet works as a primitive budget.

A last point: being careful with small amounts is not necessarily the correct behaviour. I find that I am willing to spend more effort and time to get something for 10 instead of 20, than I would to get something for 990 instead of a 1000. In those cases, my behaviour for large amounts may well be the really efficient behaviour.

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Re: What exactly is the effect of not handling your own mone

Postby ianf » Sun Apr 18, 2010 1:40 pm UTC

I pretty much use only cash for buying stuff (apart from things which go straight out of my bank account). It doesn't really stop me from buying things. I don't usually know that accurately how much I've got in my wallet, but I do know pretty well how much is in my bank account. I'll notice when I have to break a 20 or something.

I think the context is important too. For example, I'll say "that's nothing" when talking about several thousand pounds at work, but if that was personal money then I would obviously consider it a lot of money.

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Re: What exactly is the effect of not handling your own mone

Postby Technical Ben » Sun Apr 18, 2010 5:19 pm UTC

I hardly use cash for purchases over a few pounds, mainly chocolate bars! I use my cards for most trips to the shops and everything else. But I am a bit strange with my cash. I average out all my bill in my head to have an idea of what I have to spend or what I have left to pay. It seems to work for me, but I know many people have a lot of trouble getting their spending right. However, I do have a routine. So I'll nearly always spend the same amount every time I shop. I spend £10 or £20 for a bag or two of shopping without looking at the prices, and often get it to the penny! :D

But then I tend to quantify the price of things in my head. If I want to save up for something that's £50, then I could forfeit 5 takeaways at £10 each. My wages can pay my rent/mortgage 3 times over in one month. My car tax is once a year but roughly £10 a month. So I am able to save up during the year for one off large bills. I still have a bit left at the end of the month to spoil myself with. However saying that I try not to waist too much money on frivolous purchases. My brothers are the total opposite, and have to spend every penny they have as soon as they get hold of it.
I blame the lack of economical or practical education for many youngsters. They see there parents spend money meant for bills on cigarettes, alcohol or gadgets and end up in debt. Not knowing how to manage their own finances they follow suit.

[edit] I realised how I know how much is in my bank account. It's a bit of an obsessive compulsive habit of checking my statements and account balance. I then take off my purchases in my head, and have a running balance in mind. I've seen many of my customers not know how much they earn, spend or have in their account. So it's a formula for disaster.
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Re: What exactly is the effect of not handling your own mone

Postby Pesto » Sun Apr 18, 2010 9:38 pm UTC

I don't think cash vs. credit really affects the way I spend money. I don't deliberately save money, it's just that I don't spend a whole lot, so my bank account tends to grow. At any given point in time, I know I have enough money for rent, food, and whatever other incidental expenses come up.

I always look at the price of something and decide whether I want it or not based on that, be it lunch or a book. If someplace doesn't take credit, there's always a bank around the corner with a Magic Money Dispensing Machine, so those options seem fairly equal in my mind.

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Re: What exactly is the effect of not handling your own mone

Postby Khafji » Mon Apr 19, 2010 7:58 pm UTC

Psht.

Treating money as an abstract concept is a good start in my opinion. Its value degrades over time depending on perceived ability to convert it into tangible goods (edit: like gold...cause...you know...gold is so valuable in and of itself. what the hell) or intangible services. You can put it into complex investment vehicles like derivatives or futures that are abstracted ways of gambling against these perceptions. Or, alternatively, you can put it into more "solid" investments, such as a mutual fund, which simply puts money into a company. Except, of course, that there is a person behind that acting on what often is incomplete data and derived values of companies based on things as intangible as market saturation.

This post just made me angry for some reason. Stupid money. *shakes fist at money*


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