The denomination effect is the tendency for people to be more willing to spend money when it is held in the form of several smaller denomination bills or coins than when the same total value is held as a single larger denomination bill. The economists Priya Raghubir and Joydeep Srivastava demonstrated the effect experimentally in a 2009 study, finding that participants given change in smaller bills spent more of it on discretionary purchases than participants given the equivalent amount as a single larger bill, even though the actual purchasing power was identical either way. The effect is discussed in behavioral economics as an example of mental accounting, in which money is not treated as perfectly fungible but is instead evaluated differently depending on its physical form or the psychological account it is perceived to belong to.
Facts
Core ClaimThe denomination effect is a form of cognitive bias relating to currency, suggesting people may be less likely to spend larger currency denominations than their equivalent value in smaller denominations. 1 First Described Year Classification
Type of Phenomenon Sources
1. Wikipedia: Denomination effect
Wikimedia Foundationlead paragraph
The denomination effect is a form of cognitive bias relating to currency, suggesting people may be less likely to spend larger currency denominations than their equivalent value in smaller denominations.
lead paragraph, second sentence
It was proposed by Priya Raghubir, professor at the New York University Stern School of Business, and Joydeep Srivastava, professor at University of Maryland, in their 2009 paper "Denomination Effect".
lead section, phenomenon-kind classification
The denomination effect is a form of cognitive bias relating to currency, suggesting people may be less likely to spend larger currency denominations than their equivalent value in smaller denominations.
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