Why (Bill) Size Really Does Matter

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In some Big Apple circles there’s a concept referred to as “The New York City Street Tax.” This isn’t anything official. Rather, the idea is that the simple act of walking through the city—walking through any bustling city, really—costs people money because one way or another folks are more likely to spend a dollar or two here (“Mmm, pretzel…”) and five or ten dollars there (“Wow, a Rolex watch!”) as they ambulate from Point A to Point B. That’s especially true, the theory goes, once you break a big bill into smaller denominations; they’re just “easier” to spend. (It’s also especially true for tourists, we suspect.) That said, the NYC Street Tax, which is more a conversation starter than anything else—has never really had much in the way of, you know, fact behind it. Except that it does. Turns out, the nature of the cash you keep on your person affects your spending habits.We know this from a paper soon-to-be-published in the Journal of Consumer Research by marketing professors Priya Raghubir and Joydeep Srivastava, which provides further evidence for a simple way we can influence the decision to save or spend—keep the right sort of bills in your wallet. Turns out, people really are less likely to spend money when the cash they have is in the form of larger bills; and more likely if they’re carrying smaller denominations. And if you think you’ve heard this from us before, well, you’re almost right.

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Raghubir and Srivastava’s results—what they’ve described in previous research as the “denomination effect”—are consistent with an idea we’ve discussed several times: mental accounting. Small bills tend to get assigned to something like a mental petty cash account, and so we’re willing to spend them on petty things. Larger bills, in contrast, are naturally thought of more as “real money” and so we’re reluctant to spend them on things that aren’t of real importance.

So, if you want to save, don’t carry around a bunch of ones, fives and tens; opt instead for 20s, 50s, even 100s. Conversely, if your aim is to be more comfortable spending your riches—of if you want to launch your own economic stimulus package—carry around small denominations.

(MORE: Survey: Women Are Smarter, More Thorough When Buying Cars)

And come to New York for a visit!