Why we're willing to pay more when no cash is involved in a transaction.


Cashless Effect

, explained.

What is the Cashless Effect?

The cashless effect, especially relevant given India’s recent move towards a demonetized society and the same general trend in many other societies, describes our tendency to willingly pay more when we do not see the money.

Why does it happen?

As a result, people tend to buy more valuable products, and in larger quantities, when making credit card purchases than when making cash purchases. The idea behind this is that we are aware of the exchange of value which occurs when we pay with cash because cash is visible and tangible, but lose that sense of awareness when using credit cards due to the loss of tangibility. As we transition into a cashless society, we will need to be aware of this effect in order to mitigate the resulting harmful effects and avoid overspending.


A study by Soman in the early 2000’s found that apartment residents were willing to spend more money on laundry, and were therefore more likely to (unecessarily) separate their laundry, when they used a pre-paid laundry card than when they paid with coins.