by David Wolman
The reason, says Ariely, is that when stealing involves money that is one (or many) steps removed from cash, we more easily rationalize dishonesty. The veiled monetary value makes the morally reprehensible act “fuzzier” than a straight-up holdup, and that allows us to wield our impressive powers of justification. At the office, we might tell ourselves that disappearing staplers are simply part of the larger cost of doing business; what company doesn’t expect employees to take a few items home? Plus, don’t you deserve some trifling office supplies, after all those years of loyalty to the firm? It’s not like you’re walking off with a company car. With the stolen Cokes, the rationale is even easier: if there are any what’s-mine-is-yours communities left on Earth, they are college dormitories.
These findings help us to understand the thinking—or lack thereof—that goes on in the minds of villains like Bernie Madoff, the architects of the Enron scam, and even bankers who sell legal but toxic assets. Ariely ventures that these people, and millions like them, wouldn’t mug an old lady on the street, and he’s probably right. Fuzzy up the transaction, though, and it brings out the worst in us. “We need to recognize that once cash is a step away,” writes Ariely, “we will cheat by a factor bigger than we could ever imagine.”
It would be foolhardy, though, to jump to the conclusion that this handful of findings about behavior provides a meaty defense for keeping cash around. Cash itself isn’t more honest, despite its associations with Abe Lincoln and God. It all comes back to the salience of the form, and the fact that we’ve been acculturated to behave more honestly with this particular one. We’ve all been taught that stealing a thing, anything, is bad, and physical money is just a thing. But that doesn’t mean the more honest behavior we exhibit when dealing with cash can’t be recreated, or reengineered, in future technologies. Imagine a smartphone app, for instance, that showcases, through vivid images and sound, the act of transferring value between your checking account and the merchant’s.
Besides, I don’t think cash keeps us as honest as Ariely suspects. For one thing, greenbacks sitting in a fridge are a weird thing to encounter, unless you’re that congressman from Louisiana who hid his bribe money in the freezer. The circumstances of that test are atypical enough that the results are an iffy gauge of typical behavior. More significant is the fact that he used $1 bills. People don’t pick up pennies off the street anymore, and many would not hold up traffic to fetch a quarter, and morality has little or nothing to do with those decisions.
For students at one of the best colleges in the country, who might just have an inkling that dollars sitting in a fridge are part of a trick or experiment, what is there to gain by stealing $1 or, at most, $6? Perhaps this experiment says more about inflation than it does human behavior. I’d like to see how honest cash makes people when researchers use $50 bills as bait, and leave them someplace where subjects don’t have to wonder if the money belongs to a friend living across the hall. Still, Ariely is right that white-collar criminals who would never steal a wallet but have no qualms about stealing millions from a pension fund are, to use the technical term, assholes.
WHEN IT COMES TO MONEY’S FORM, our cognitive foibles don’t begin and end with plastic versus paper, or the morality of stealing soda. One of our most fundamental hang-ups is conflating the face value printed on a price tag, menu, or banknote with the real value of something—the bundle of goods or services we can acquire with it. There is even a name for it: the money illusion, made famous by an economist named Irving Fisher. In his 1928 book, The Money Illusion, Fisher describes how physical representations of money can be a confusing, even misleading, measure of value.17
We get duped into thinking banknotes have value equivalent to the numbers printed on them, not a gauge of something else’s worth. Back when we had the gold standard, people could at least imagine money as a specific amount of something earthly. Now everything is, quite literally, relative. For people living in countries that have more recently experienced rip-roaring inflation or currency crises, this relativity is easier to grasp. One week 10,000 pesos pays the rent, the next week it can’t buy a tank of gas.
The money illusion in the modern age can have a bizarre influence on our decisions. Because we have a built-in bias for bigger numbers, we presume that the higher-priced wine, automobile, restaurant, college, or hotel will offer better quality, better value. Economists have even shown that the placebo effect of a pretend medication (vitamin C pills, for instance) is stronger when the price of the “drug” is higher.18 The money illusion also helps to explain why we value a $100 gift card or check as less than an equivalent amount of cash, which is to say we are more apt to spend it. The artifice with gift cards is that they have no value, so we act as if they’re play money. To economists, a restaurant coupon worth $100 equals $100 in cash, equals $100 in a bank account. Yet these different iterations of $100 are not at all equal when measured by the yardstick of human behavior.
We also treat cash differently depending on the denomination. Anyone who has ever felt reluctant to break a $100 bill, or rummaged through a purse for the satisfaction of paying with exact change, will recognize this instinct. Twenty times five may equal one hundred always and forever to mathematicians, but in the mind, five $20 bills do not equal a $100 bill. In the opposite direction, we’re more willing to part with coins than we are an equivalent amount of bills, and this tendency has been demonstrated among populations from the American heartland to eastern China.19 Following the 2007–2008 financial crisis, one scientist joked that the Obama administration, as part of its stimulus package, should issue more $1 coins, or even $2 ones, because peoples’ willingness to spend coins would spur spending.20
“A coin symbolizes man’s free will,” wrote Jorge Luis Borges. Yet our predispositions and inconsistencies suggest otherwise. If you don’t think these forces impact how you spend your money, it’s only because you haven’t spent much time with people like Priya Raghubir, a professor of marketing at New York University’s Stern School of Business. One of Raghubir’s recent studies looked at how we treat different national currencies. Most people assume that Americans traveling abroad spend more in a country like Thailand or Argentina, where prices are cheap compared to prices at home. But Raghubir and her fellow researchers have found that how a price appears has such a powerful influence that it can usurp our rational understanding of the real price—the real value. They dubbed this phenomenon the denomination effect.
In Thailand, transactions are often conducted with 500- and 1,000-bhat banknotes, and the key is that those are multiples of the paper money denominations at home in the United States. As of October 2011, 1,000 bhats would buy you about $32. “But you latch onto the fact that this is 1,000 somethings,” says Raghubir. Although you know, at the intellectual level, that numerical value is distinct from that money’s purchasing power, the large number will trick you into thinking prices in Bangkok are steeper than they really are. As a result, Americans in Thailand are far more frugal than predictions of rational economic decision-making would suggest.j
What happens when the situation is reversed? Raghubir found that Americans transacting in Britain or Bahrain, countries where U.S. dollars are represented as a fraction of the local currency, spend more. These aren’t just quirks of the American psyche, either. During the implementation of the euro, the new currency was valued at a fraction of the national currencies it was to replace (except in Ireland), so that two Deutsche Marks, for instance, equaled one euro. Again, Raghubir found people were spending much more with this new money, almost as if it were Monopoly® money.21 It’s the money illusion cross-pollinated with currency confusion. “People are unable to calculate the exchange rates, even if the calculation is trivially easy!” All those zeroes on the restaurant menu in Bangkok or on a Thai banknote block us from thinking clearly.
Perhaps nothing is more cuckoo, though, than cash’s role as happiness elixir. In the years ahead, as physical money fortifies itself against an onslaught of new
technologies and critics, one of its most formidable defenses may turn out to be emotional, not economic. For starters, there is the notion that dealing with cash encourages honesty, at least when it comes to our reluctance to steal $1 bills versus cans of Coke.
But a recent series of studies involving pain illustrates physical money’s true mental charms. When people are exposed to cash versus slips of blank paper, they’re better insulated from a particular type of social pain. In one experiment, participants played a computer game in which they were asked to pass a ball around to other people who were also playing the game. But the fix was in. The test subjects never got the ball, like kids ostracized on a playground.
Past investigations have shown that even this seemingly simple exercise leads to empirically significant feelings of rejection. In this scenario, however, subjects who handled banknotes before the game started were less affected by the experience of exclusion. The socially painful event was less painful for the cash handlers, which is a roundabout way of saying that handling cash warms the heart, or at least bolsters the ego. And it does so even when that money isn’t our own.22
The same researchers then decided to up the stakes. After having subjects count out either banknotes or blank paper, the scientists had them put their fingers in hot water for thirty seconds. Cash, it turns out, is like a suit of armor. The money counters didn’t think the water was as hot as the paper counters did, and those who handled the banknotes reported feeling less pain. It’s as if every interaction with cash, at the subconscious level, takes us back to the sensation of reaching under a pillow the day after losing a tooth, and bumping into the cool metal of a fifty-cent piece. Cash feels good.
Summarizing the results of these investigations in an article for the journal Science, researchers concluded that material money appears to make us feel less pressure to be included or liked by others, shields us from feeling emotional or physical pain, reduces feelings of rejection, and promotes feelings of independence and self-sufficiency. The other side of this coin is that the money handlers in the studies tended to be more distant from others, less helpful, and less inclined toward teamwork.
With cash that is rightfully ours, these emotional forces are only magnified. When a waiter or store clerk gives you $8.75 in change after settling your bill, maybe you leave the $3.75 as a tip and put the fiver in your wallet, that nice new burgundy wallet bought during the memorable autumn shopping day with your sister. You align it just the way you like next to photos of your kids, your personalized credit cards, your driver’s license, and your gym membership card. Or maybe you prefer a money clip, the one your grandfather gave you when you were a boy. Using the clip, you never think about how unhygienic banknotes are, let alone about tax evasion or bank robberies. No, you think about your suave grandfather—how the money clip is part of what made him cool—a man’s man, like Sinatra or McQueen. (“Men carry cash,” is how Esquire magazine decided to open its 2009 cover package entitled “How to Be a Man.” I’ll bet Kim Jong Il saved a copy of that one. Dave Birch? Not so much.)
Besides, we’ve wired cash into our cultures. It’s not just tipping and tooth fairies—it’s passing the plate at church or during Hindu Aarti offerings. It’s Hanukkah geld, donations at Shinto Buddhist shrines, and a shower of coins during Persian weddings. The intricate and extensive role of paper money in Japan is especially interesting because it runs contrary to the widespread belief that Japan is speeding toward cashlessness. In Tokyo’s bustling day-glow hotspots like Shinjuku or Shibuya, high-tech cash substitutes are indeed easy to notice—stored-value cards, for example, with cutesy names like Suica and Pasmo, as well as cellphone-based payment tools and countless types of gift cards that act as a kind of pseudo-cash.
Yet during my trips to Japan, whenever I duck into the basement of one of the massive department stores to browse among the vendors selling assorted green teas, sweet-bean cookies, rice crackers, and square watermelons, I mostly see customers paying with cash or the occasional credit or debit card. Like people throughout the world, there is a sense among the Japanese that not having at least some cash on hand could turn a tricky situation into an emergency. What’s more, cash gifts are almost a national obsession, required for all kinds of special occasions like weddings and graduations, and on holidays like New Year’s. The custom is to give crisp new banknotes, except in the case of a condolence for the family of someone who has died. In that situation you have to give old banknotes, indicating to the recipients that you know this is not a happy time.
None of this bodes well for the anti-cash crusade. If people throughout the world like this form of money, if it’s so intertwined with culture, if it hurts more to part with it, and if it gives us a buzz merely to handle it, who in his right mind would want to abandon it, other than maybe that Manhattan restaurateur who wants to keep poor people away?
If the choice were really this kind of oversimplified either–or, I’d probably stick up for cash. But the future of how we pay will have all kinds of options. We can already see some of these better tools for transacting. PayPal’s app for smartphones nukes the need for having cash on hand to divvy up a restaurant bill. We can just “bump” phones to “flash” (e-mail, zap, zip, send) the funds to each other right there and then, and be finished before the waiter returns with a credit card receipt to sign.
Not that we’ll need to sign for much longer. Soon enough, you won’t even need a plastic card with a magnetic stripe or a chip to hold data. Cellphones equipped with tiny antenna wirelessly transmit payment for something with a quick tap on a reader device at the cash register. By 2014, transactions conducted via wireless connections from our phones are expected to total $1.13 trillion.23 Initially, most of these new technologies will only provide alternative ways to make a credit card charge, but that too is changing, as users turn to person-to-person methods that cut out the middlemen, the cumulative effect of which is fewer tack-on fees and less friction in our economic lives.
But one worry with new digital tools is that they will further separate us from the act of spending, pushing us in the direction of less responsible financial decisions, if that’s even possible. I don’t buy that fatalistic view because we can use findings from behavioral economics to better ourselves. As disheartening as it can be to learn about how irrationally we treat money, the upside is that these insights can guide the development of future forms of money and financial devices. We can design systems that coax us into making wiser choices. This isn’t Huxleyian enemy-state social engineering—it’s just smarter tools, like automobiles that adjust to icy driving conditions, or coffee pots that shut off after a certain amount of time so that you don’t set fire to the kitchen.
A service as basic as an e-mail reminder to pay a bill on time is a simple example of just such an attempt to compensate for human frailty. A more substantial instance of applying behavioral economics findings to everyday life is default participation in 401(k) plans. People are both myopic about financial planning and plagued by their own inertia, and they keep putting off signing up for a retirement savings program even if they want to be in one. So policymakers recently made retirement savings an opt-out program instead of an opt-in one. Presto: more Americans now save for retirement.
In his discussion about cheating and how we can be “dishonest without thinking of ourselves as dishonest,” Ariely provides a quick aside about ways these tendencies could be fixed. We could label office items at work with a price, for example. That might reduce peoples’ habit of helping themselves (although it could also backfire because it makes an employer look so distrustful). But what if we used more targeted language when talking about stock options and mortgage-backed securities, to eliminate the fuzziness of the values involved, and any morally suspect decisions that may be embedded within them? What if we started using words like curchase? Knowing what we know about ourselves, we can manipulate our biases about money for the better. The personal finance tools that we now use, or have at least come across, pro
vide clues as to how this can happen. Consider something as unsexy as Quicken, the desktop software for financial organization, and how much it helps people budget and keep track of spending, all without having to store cash in categorized envelopes.
More recently, there are services like Mint.com, which pull together your various accounts, credit cards, investments, home loan, and the like, into one easy-to-digest website or smartphone app. Mint puts your net worth right at the top of the screen. If you’re like millions of homeowners in the United States, that means a negative number is now a very salient part of your everyday life. Might that influence behavior, such as willingness to pay, in just the opposite way that those gold- or platinum-colored credit cards hypnotize us into spending more than we should? We can’t yet answer that question because these apps—and the everyday use of apps—are still so new and evolving, but I would bet yes.
An app I want to see will recreate the salience of relinquishing paper money, or cleverly simulate the pain in spending currently only associated with cash. Maybe you’ll see images of banknotes on the display, and receive an audible message of caution about discretionary spending from a Ben Franklin impersonator. If you find you still have trouble controlling your spending, you could program your mobile wallet to halt transactions after spending a certain amount, or to require you to sing an embarrassing song in order to make the transaction go through. It’s a bit like the Gmail feature Google offered a few years ago. People leery of sending drunk e-mails could turn on a filter of sorts, which makes them perform a math problem before sending the composed message. If the user is too slow or can’t get the right answer, Gmail won’t send the potentially regrettable message.