Good Cop...Bad Cop - control your "pain of paying" dial

Did you know that the same part of the brain is activated when we bang our finger with a hammer as when we are charged $5 for a small coffee?  Well it’s true – psychologists and scientists have found the same section of our brain that deals with pain processing is stimulated when we buy something we think is highly priced. This is known as the pain of paying.

Further to this ask yourself; why does it feel different when we use cash instead of paying by credit card?  What feels worse?  Why does the cash feel different?  All these questions relate back to the notion of the pain of paying.

Now what is probably great news for the business models of VISA, MasterCard and American Express (that’s not an investment recommendation by the way!) - George Lowenstein a professor at Carnegie Mellon who has completed extensive studies into this area found “credit cards effectively anesthetise the pain of paying”.  Who would have thought that when they are boiled right down credit card providers are nothing more than pharmaceutical companies!

Studies have confirmed that people’s spending habits change depending on whether they use cash or credit card.   In one example, grocery store customers who paid with cash spent on average 40% less than those who paid by card.  This illustrates the pain of paying is magnified when we use physical cash and therefore people refrain from spending it more than when swiping a bank card.  In the “tap and go” world we live in – I think this highlights it might be more money-smart if you want to save a few bucks to take a handful of $20 notes down to your local Woolies when you are doing the weekly shop.  

At Flinders Wealth we are not in the business of wanting to watch our pennies all the time – so we got thinking about how we could use the notion of the pain of paying to enhance not detract from something that should be an enjoyable experience.

Dan Ariely a behavioural psychologist from Duke University gave us some clues when he found the pain of paying is “magnified when we pay for something at the same time we are consuming it.”

Take for example when you are on holiday – after a long day of sight-seeing you’ve made a booking at the well-renowned seafood restaurant down by the beach. You think there would be no better way to end the day by tucking into a quality bottle of wine as you overlook the ocean. The waiter brings over the wine list – but as you look through it all the good bottles are priced over $100.  You think to yourself that although you’d love a couple of glasses of Margaret River's finest Chardonnay to take the edge off things you really don’t fancy paying $100+.  Spending that amount would ultimately detract from your enjoyment of drinking the wine.

This is probably one of the reasons why the all-inclusive holiday cruise packages are proving so popular (particularly with retirees).  Under these types of holidays - you pay an up-front cost before you go that covers all your accommodation, travel, food and drinks.  So when you are thinking of having dinner and enjoying a bottle of vino– having to pull money out of your pocket to pay for it is removed.  The pain of paying has disappeared – and this will result in a more pleasurable experience.

Now we are certainly not advocating retirees spend their children’s inheritance (well at least not all of it) by going out and booking a pre-paid all-inclusive holiday– but the pain of paying is a fascinating concept that can be used not only to save you money but enhance the enjoyment of an experience as well.