Denomination Effect

What is the denomination effect?

The denomination effect is a difference in spending when the same amount of money is held in different denominations. Raghubir and Srivastava found that people were less likely to spend an amount held as one large bill than the equivalent amount held as smaller bills.

Spending a bill versus spending an amount

Holding one $100 bill is financially equivalent to holding twenty $5 bills. The denomination effect concerns whether that packaging changes spending.

The decision to spend and the amount spent are distinct: in two of the three field studies, people with larger denominations spent more once they began spending. The authors also found that consumers could choose a large bill as a way to limit spending. The effect therefore does not simply mean that people underestimate the value of small bills or always make worse decisions.

For budgeting, compare the total spent as well as whether someone starts spending. A large bill could make spending less likely without making the eventual purchase smaller.

The bottom-dollar effect concerns the experience of spending the last of an available budget.

Source: The Denomination Effect.