Note To Family & Friends: I Prefer Cash

This post was written by Mengmeng Wang, Contributing Writer on November 17, 2008
Posted Under: Better Spending Habits, Psychology of Finance

We all know that companies benefit from offering gift cards, which is probably why there are so many of them. People spend their money much more readily when they use a gift card rather than cash, and they also tend to spend a higher amount of money in the store overall. Professor Dan Horne of Providence College, also known as the “Gift Card Guru,” estimates that people on average spend 40 percent over the face value of the card. So basically, if you gave me a $100 gift card right now, it’d actually be more like reaching into my wallet and taking forty bucks (if you can even find that much, but that’s another story). Some gift.

But why exactly does this happen? Well, there are actually two reasons. The first one should be fairly obvious. When you buy something using a gift card, you rarely use exactly the amount on the card. People tend to spend more than the face value of the card just to clean out its balance.

The second reason is much more interesting. Researchers Priya Raghubir and Joydeep Srivastava found in a study that the more transparent the form of payment (cash being the most transparent), the more painful it is for people to spend it. They conducted an experiment in which two sets of people were given the option of buying a Starburst candy at $1. The first set was given a gift certificate that they could exchange for either $1 in cash or the Starburst, while the second set was simply given a dollar to spend. Only about 10 percent of the people spent their dollar on the Starburst when it was given in cash, whereas almost 50 percent spent it when it was given as a gift certificate. The gift certificates, which are a less transparent form of payment than cash, were essentially treated like play money, thus numbing the pain of payment in the minds of the buyers and allowing people to spend more (and more frivolously) than they would if they were using cash.

Some companies may be offering these cards as a service to their customers, but I tend to think it is probably just a good way to increase profits. Either way, in the end, it’s my problem—or rather, my brain’s problem—for falling prey to these Jedi mind tricks. But having taken responsibility for my mind, I’ve publicly declared my preference. Gift cards suck. Which is why if I get a gift card from you, I’ll just assume that you hate me.

update: This article was included in the Carnival of Personal Finance #180 which is hosted this week by Living Almost Large.

Bookmark or Share

Viewing 4 Comments

    • ^
    • v
    What an interesting study! I'd have thought that GC's would lead you to spend more because you would think of the money as a windfall--easy come, easy go. And you would think of it as selecting a gift that someone else would have given you anyway, free, so tossing in an extra few bucks of your own would mean that you could get something you couldn't otherwise afford. That theory, however, is belied by the experiment comparing what people will do with "free" cash vs. a "free" gift card.

    Amazing!

    How do you feel about receiving objects as gifts? Having been brought up during the Cretaceous period, I tend to feel gifts of cash and "gift cards" are tacky and rude. But on the other hand, when the person has everything he needs, who am I to decide what kind of aftershave he should have? Maybe it's less arrogant to give the friend or relative money...or...even nothing? The gift of not feeling like he has to reciprocate?
    • ^
    • v
    To me, gift cards say, "we're friends, but I don't really know anything about you, so here's some money instead." I don't think I would ever give cold hard cash to any of my friends as a gift, but in China, red envelopes are the norm for holidays, weddings, birthdays, and other special occasions, and it's totally okay to give money as a gift (and I'm totally okay with getting it).

    That being said, I wholeheartedly believe in giving gifts, as long as there's thought behind it. Like Matt said, it should be something that makes the gift receiver go, "wow, you're ridiculously awesome." So if that aftershave you're talking about will have that effect, then why not?
    • ^
    • v
    Interesting... I love gift cards.

    If given cash I'm likely to spend it on bills or other necessities. For my birthday I like having money I can spend at my favorite stores without feeling guilty.

    With my couponing skills I can usually easily get %40-%50 more value out of the card. In other words if I get a card for $100 I can often get up to $150 worth of merchandise out of it. I could do this with cash as well, but I get a little icky when someone gives me a (insert object here) from those stores, knowing that they likely paid too much for it.

    I love to give gift cards to several of my friends. I know them quite well which is why I know that giving them the freedom to enjoy an overpriced coffee drink from their favorite coffee shop will be appreciated far more than a regular gift.
    • ^
    • v
    Retailers also benefit when a gift card is not used and expires.

    Gift givers often want the recipient to use the gift card on something slightly frivolous, rather than something necessary, but boring. So the aspect of making the purchase less painful, is not entirely a bad thing.
 

Trackbacks

(Trackback URL)

close Reblog this comment
Powered by Disqus · Learn more
blog comments powered by Disqus
Next Post: The “I Will Thrive” Video
Previous Post: eBay Makes Me Do Bad Things

© 2009 LendingTree, LLC. All Rights Reserved. Call Thrive at 1.888.831.4080