In 2001, Drazen Prelec and Duncan Simester, business professors at MIT, conducted a real life auction for tickets to a Boston Celtics game. Half the participants in the auction were informed that they had to pay with cash; the other half had to pay with a credit card. Prelec and Simester then averaged the bids for the two different groups. The results were depressing, at least for heavy credit card users like me: The average bid on a credit car was nearly twice as high as the average cash bid. When people used their Visa or Mastercard, they were suddenly willing to spend far more money to see a basketball game. Prelec and Simester entitled their paper: “Always Leave Home Without It.”
I was thinking of the Celtics auction while reading this Times article about paying for stuff with cell phones, which is certain to be the the next big point of purchase trend. Why? Because it’s so damn easy:
The cellphone has been more than a cellphone for years, but soon it could take on an entirely new role — standing in for all of the credit and debit cards crammed into wallets.Instead of swiping a plastic card at the checkout counter, consumers would merely wave their phones.
Mobile phone carriers, banks, credit card issuers, payment networks and technology companies are all vying to control these wallets. But first, they need to sort out what role each will play and how each will get paid.
The stakes are enormous because small, hidden fees that are generated every time consumers swipe their cards add up to tens of billions of dollars annually in the United States alone.
Oh vey. The problem with cell phones – and the problem with plastic before that – is that they reduce the friction of payment. In fact, they make it so easy that we spend irresponsibly. When it comes to consumption, there seems to be a sad tradeoff between convenience and prudence.
To understand why this tradeoff exists, it helps to know a bit about how the brain makes retail decisions. Consider this clever experiment, designed by Brian Knutson of Stanford and George Loewenstein at Carnegie-Mellon. (I discuss this experiment in How We Decide.) A few dozen lucky undergraduates were recruited as experimental subjects and given a generous amount of spending money. The subjects were then offered the chance to buy dozens of different objects, from a digital voice recorder to gourmet chocolates to the latest Harry Potter book. After staring at the object for a few seconds, the students were shown the price tag. If they chose to buy the item, its cost was deducted from their pile of cash.
The first thing the scientists discovered is that exposing subjects to an object they wanted led to increased activation in the nucleus accumbens (NAcc). That’s not particularly surprising: the NAcc is a crucial part of the dopamine reward pathway, and is turned on by all sorts of expected pleasures. But then came the price tag. When the experimental subjects were shown the cost of the product, their insula and prefrontal cortex were activated. The insula secretes aversive feelings, and is triggered by things like nicotine withdrawal and pictures of people in pain. In general, we try to avoid anything that makes our insula excited. Apparently, this includes spending money.
By measuring the relative amount of activity in each brain region, the scientists could predict the subjects’ shopping decisions. They knew which products people would buy before the people themselves did. If the insula’s negativity exceeded the positive feelings generated by the NAcc, then the subject typicall chose not to buy the item. However, if the NAcc was more active than the insula, the object proved irresistible. The sting of spending money couldn’t compete with the thrill of getting something new.
Here’s the problem with credit cards: the insula doesn’t seem to understand how they work. When we pay with plastic, the transaction is abstracted. Instead of forking over cash, we just swipe a thin card. As a result, the usual hurt of spending is diminished – we barely notice that we’ve given something up. (As the scientists note, “The nature of credit cards ensures that your brain is anaesthetized against the pain of payment.”). Because spending money doesn’t feel bad, we spend more money, even when we can’t afford it.
Cell phones, of course, will make such retail transactions even more abstract. (At least credit cards are dedicated to payment.) I can only imagine how much people will bid for Celtics tickets once they can bid by phone.Go Back to Top. Skip To: Start of Article.