Future savings pays price for cash dependence

Special to Western NewsIvey Business School professor Rod Duclos said when it comes to spending or shopping situations, cash is your friend, but in saving situations, cash actually turns into your enemy. He research on this recently appeared in the Journal of Consumer Psychology.

The pain associated with spending cold hard cash – versus the relative ease of debit or credit – motivates many of us to spend less in the moment. But that penny-pinching today may be costing us down the road, even if we have no idea it is happening, according to a Western-led study.

“This insight that ‘cash is your friend, it helps you save more’ is actually false,” explained Ivey Business School professor Rod Duclos. “In spending or shopping situations, cash is your friend. But in saving situations, cash actually turns into your enemy.”

Duclos’ recent work explores people’s relationship with money – both the concrete in your pocket and the virtual associated with credit or debit cards.

For many, parting with cash in hand is difficult. Spending bills and change induces psychological pain that fMRI scans have shown to light up the same regions of the brain associated with physical pain. But understanding that mindset is key in a world not as digitized as you might think when it comes to money.

Duclos noted almost 20 per cent of workers in the United States collect part (if not all) of their wages in cash. In India, only 8 per cent of its population uses electronic banking. Globally, 1.8 billion workers are paid in cash.

With so many still navigating life primarily with cash, Duclos suggests much of the world’s workers may be at a chronic disadvantage when it comes to long‐term saving.

With that in mind, Duclos conducted a study including Western staff members and students who were asked to compete a word puzzle for payment. One group would be paid in cash, the other in credit to their Western One card. While processing their payment, Duclos offered all participants the following deal: Walk away with $5 immediately or walk away with nothing now, but return to his lab a week later to collect $7.

“In essence, we turned our lab into a financial institution,” he said. “Leaving money with us for a week guaranteed an incremental gain of $2, allowing us to assess participants’ patience and willingness to wait for the larger‐later payoff.”

Of those who were promised cash, half opted for the larger payoff the following week, whereas three quarters of those promised credit agreed to come back.

“You have $5 and I’m offering you the greatest opportunity of a lifetime. Going from $5 to $7 in just a week corresponds to a 2,000 per cent (per year) return. This the most rewards investment scheme you’ll ever encounter in your entire life,” he said.

“But because it’s so painful to let go of that cash now, even for just a short period, people are less willing to let go. When they don’t have to let go of cash, they just have to let go of this invisible money, then they are much more amenable to it.”

This is a huge concern, Duclos stressed.

When ‘cash people’ plan for retirement, parting with money today for a return years down the road is not top of mind. And with studies showing 80 per cent of what you spend on your health care, for example, is going to be used in the last 20 years of your life, a lack of financial security is going to make for tough decisions.

“People can barely make enough money now to cover their expenses, which is why there is credit card debt,” Duclos said. “If they can’t make ends meet when working, imagine what it will be like when they retire. Those above 55 have to start thinking ‘medication or rent.’”

Duclos describes two different kinds of people – promotion focused and prevention focused. Promotion-focused individuals seize opportunities by creating chances like the 2,000 per cent interest on their money. Prevention-focused individuals are prudent and careful to avoid bad things happening to them.

In the second part of the study, Duclos looked to heighten prevention focus in people and perhaps close the gap observed in the first study.

He employed the same rules, except prior to starting, participants were asked to picture a product that helps prevent undesirable outcomes, like a bike helmet, seat belt or health insurance. Once in their mind, Duclos gave them the offer: Did they want the $5 immediately or wait a week for $7?

In contrast to the initial study, both those promised cash and those promised credit thought more long-term.

“Even when people have cash in hand, by activating their prevention focus, we increased their resistance to the pain of parting with cash. It’s not easy, but it can be done,” Duclos said. “One way is to alert them to the fact there are decision-making biases they are not aware of, but are still playing against them. Making them aware is the first step to freeing themselves from those biases.”

The study, Compared to Dematerialized Money, Cash Increases Impatience in Intertemporal Choice, appeared in the Journal of Consumer Psychology. Duclos conducted the study with Mansur Khamitov, an assistant professor at Nanyang Technological University in Singapore.