Interestingly, the results of two of their three studies also showed that, once the decision to spend had been made, the people who had decided to break their higher denomination banknote spent more than those who had decided to spend smaller denomination money. Once someone decides to break a higher denomination banknote, they often spend more than someone using smaller denominations and they are less satisfied with their purchases. Apparently, the larger banknotes were more painful to spend. Of the women who did buy products, those who had broken into their large banknote were less satisfied with their purchases than those who had used smaller denominations. Compared to the women given the single 100-yuan note, twice as many of the women given the smaller banknotes decided to buy something. The women were told that they could keep the money or purchase some household products. The envelope contained either a single Renminbi (CNY) 100-yuan banknote (equivalent to roughly $14.63 USD, and quite a substantial amount of money for these women) or five banknotes adding up to an equivalent value. One hundred and fifty housewives were given an envelope of money in exchange for completing a survey. Wanting to see whether the effect was particular to American culture, the researchers took their study to China. They found that only 1 in 6 of the people who had been given a $5 bill decided to spend it, compared to about 1 in 4 of those given the $1 notes. The customers then went into the store to pay for their gas and, when they came out, the researchers asked them for their receipts. Seventy-five customers were asked to answer a short questionnaire on gas usage and were then given either a $5 bill or five $1 bills as a thank you for their time. They next surveyed customers at a gas station to see if the denomination effect held up in real-life situations. Research shows that people are faster to spend smaller-denomination money. The researchers concluded that people are more inclined to spend smaller-denomination money. Sixty-three percent of the participants with the four quarters decided to purchase candy, while only 26 percent of those given the $1 bill spent any money. One set of students was given four 25¢ coins and another was given a $1 bill. In their first experiment, undergraduate students from two American universities were given a small amount of money - ostensibly as a thank you for taking part in an experimental session - and told that they could either keep the money or spend it on candy. The term “denomination effect” was coined by marketing professors Priya Raghubir and Joydeep Srivastava in their 2009 research paper on spending behavior. The denomination effect describes our greater willingness to spend money if we use smaller denominations even though a $100 note has the same value as ten $10 notes, we are much more likely to spend the $10 notes before we even think of touching the $100. Chances are, this time you’ll skip the panini. Now picture this: same scenario, but when you look in your wallet you see a $5 bill and a $50 bill. You look in your wallet and see that you have two $5 bills. Breakfast did not fill you up as much as it usually does, and you’re feeling peckish. You pick up your usual large mocha and you eye the ham and cheese paninis hungrily. Picture this: you’re going to the office and you stop at your regular coffee shop on the way. The Denomination Effect explains why you’re more likely to hang on to a $100 bill than five $20s.
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