Do Credit Cards Really Encourage Spending?
There is a widespread theory that credit cards cause people to spend more. A lot of behavioral economists and sympathetic journalists have spent a lot of time speaking about this in conferences and the media.
The gold standard method for determining causality is a controlled experiment. Recently, two academics ran the only published field trial of which I am aware that randomly assigned credit card vs. cash purchase opportunities to people in a live commercial environment. Their conclusion: “Surprisingly, we find that credit cards do not increase spending.”
One non-replicated study doesn’t prove a whole lot. It’s also facile to generalize from this to a statement about credit cards across many situtations. But it sure is interesting to keep in mind when you listen to very plausible-sounding theories about “temporal separation of pleasure and paying” and “human cognitive bias” and whatnot.
Jim – did you even look for other studies? A quick search shows plenty of research suggesting people are more likely to spend more with a CC, including randomized filed trials:
Drazen Prelec and Duncan Simester
(1) Sloan School of Management, MIT, 38 Memorial Drive, Cambridge, MA, 02142
Abstract In studies involving genuine transactions of potentially high value we show that willingness-to-pay can be increased when customers are instructed to use a credit card rather than cash. The effect may be large (up to 100%) and it appears unlikely that it arises due solely to liquidity constraints. In addition to demonstrating the effect, we provide a methodology for detecting it, and our findings suggest a source of variance to test alternative explanations.
I suspect your own cognitive biases prevented you from looking too hard for conflicting evidence. Ariely has published on this too…would you have posted the result without looking for contradictory evidence had it been reversed?
So those plausible sounding theories actually are backed up by research, and this one study is a surprise – precisely because it doesn’t fit in with the prior research and theories…
— Cameron · May 29, 06:15 PM · #
The only paper that I’m aware of on this topic by those two researchers is this one from 2001.
Assuming that thhis is the one you mean, it does not fit the plain English definition of a field trial in a “live commercial environment”, which is qulaifier that I was careful to place in the post.
Here are the opening sentences from the procedures section of that paper:
As I said, “one non-replicated study doesn’t prove a whole lot”, but it sure is interesting (to me, at least) that the first time this theory was tested in a live environment, it apparently failed.
Finally, while I did look for alternative “field trials in a live commercial environment”, and did not find any, it is certainly possible that there are others out there. This is why I was careful to say that the one I cited is the only one “of which I’m aware”.
— Jim Manzi · May 29, 06:40 PM · #
I’m dubious that how much someone spends on lunch in the company cafeteria is something that can be generalized to overall spending behavior.
— Steven Donegal · May 29, 06:48 PM · #
Steven:
So am I, hence the sentence in the post:
— Jim Manzi · May 29, 07:02 PM · #
Mmm. The literature from real world studies on the effects of minimum wages on employment is so far as I can tell not particularly conclusive. But the in the absence of definitive studies the theoretical argument is so very strong and basic that I’m inclined to believe that increasing the cost of labor lessens the demand. Similarly it would take a great deal to convince me that facilitating people’s spending and removing immediately realized losses, doesn’t encourage them to spend. Even if the paper had a more convincing testbed I’d want to see —- not just more than one, I’d want to see more than a handful, and the methodology had better be damn impressive. You seem to be pooh-poohing the argument from theory at the end there, but it’s not a terrible argument from theory!
— Sanjay · May 29, 07:11 PM · #
Shorter:
“I try to be mindful that just because everybody says something is true, doesn’t mean it is true.”
Congrats, Jim! You’re a skeptic and a free thinker!
— Tony Comstock · May 29, 07:43 PM · #
The problem with trying to plan randomized studies is that you’d have to generate random ‘adverse events.’ The two groups, one buying lunch with a cc, the other with cash, and then both groups have major car accident unexpected to them but planned by the researchers. Or their dog needs $2K in surgery under the same conditions.
What kind of waivers would you need someone to sign for that!?!? :)
— Rortybomb · May 29, 07:45 PM · #
My understanding is that in the dark ages before credit cards it was significantly more difficult to borrow money. You either had to sit down opposite your bank manager and explain why you needed a loan, or apply for the department store credit plan good only at that store. Over that time frame it seems probable that credit cards encourage spending.
I’m not entirely clear on what it means to say that credit cards encourage spending today. They are so built into our commercial life that I don’t see any way to do anything other than highly artificial tests. You won’t find two groups of consumers, similar except that one group has credit cards and the other doesn’t. Perhaps you could do a test like this in a third world country where mass credit is only starting to become available?
— peterg · Jun 1, 09:07 PM · #