In your opinion, what is the one thing you wished more people in the general public understood about payments and pricing?

I think what I’d like for people to realise is that the payment method matters. And it matters quite a lot. Most people think that the representation of price and how much they are spending is the most important thing, and sure, if you’re spending money you don’t have that will matter and will soon become a problem. It’s just that some payment methods enable and stimulate these “bad” behaviours, whereas others don’t. So if you know you’re not that great at managing money, you can help yourself quite a bit by knowing which method reduces spending (cash) and which methods are known for increasing spending, such as credit cards. Simple as that.

In a similar line, I wish people would know more about the payment methods that are being introduced. Every new thing we get there is to reduce friction, because the reduction of friction means spending is easier. And as such, you are much more likely to spend over and over again. So, even if you want to be an early adopter of technology and want to be the first one to do or have it, it might be good to ask yourself what exactly you are getting yourself into. Because most of these new payment methods are not being introduced for your benefit...

What do you think is the single most fascinating aspect of the psychology of payments? Where do you see the technology in this field going?

I think the fact that we know it can have so much of an impact, whereas a “normal” people don’t even stop to think about how they are paying for something is something I find fascinating.

A more theoretical aspect I find more fascinating is the theory called the pain of paying. We literally experience pain when handing over money. This theory was first proposed in 1996 by Zellermayer, in his dissertation. It got taken up by his supervisor George Loewenstein and has since become one of the most prominent theories in this field.

This theory proposes that we experience negative emotions (disgust), feelings of loss and above all, pain when paying for products or services. But more importantly, it was found that different methods of payment activate different levels of pain. As such, it was found that people experienced the most pain using cash, less pain with checks and even less pain when using credit cards. This was used to explain why people spend most on credit cards and least when using cash.

Even better, a study that we have discussed amongst ourselves showed this in the brain! When participants were put in an fMRI (brain scanner) and made to go through purchasing scenarios in which they could decide to buy a product or not. If their nucleus accumbens (reward center) lit up participants were quite likely to buy the product, but when the insular cortex lit up, the brain’s “pain centre” and it outweighed the reward centre, people wouldn’t buy the products. It would simply “cost” them too much. Amazing!

And that explains everything we know. We know that compared to cash, using credit cards is going to make you spend more, spend more frequently, spend more impulsively, misremember your spending, and is more likely to get you into debt. They are less painful, they inhibit you less, they might even stimulate you.

Now, finally, there are papers being presented on what we expect to see moving into payment technologies such as your phone and your smartwatch (not yet published). In line with theories on the pain of paying, these methods reduce the pain of paying and other frictions even more, making all the possible negative consequences (overspending, misremembering, getting into debt) even more likely. With this type of technology we are increasingly moving away from the concrete idea of money, something you can hold in your hand, something that has a physical presence and a limit, and are moving towards the idea of money being abstract. Money as an abstract idea is dangerous, as people don’t realise that there is in fact a limit to it. And that there is more to it than the numbers you can see on a screen. Money is starting to lose its meaning.

Personal finance education is an important topic for you. Why do you think it’s so important for people to be financially literate?

I think it’s really important to be financially literate, but I do have to mention first that I think it’s never been as complicated to be financially literate as it is now. The financial environment has become increasingly complex, with new startups and new technologies being introduced almost every day.

Not too long ago I wrote an article about why I think personal finance should be taught again in schools, because it used to be taught to my parents’ generation (at least in my country). They were taught how to make a household budget, how to balance the books and that when you’re out of money, it’s done. They were taught restraint and to live within their means.

Nowadays, restraint seems to be an ugly word. Everything has to be bigger, better and newer. You need to upgrade to the newest gadget (think: iPhone) as soon as it comes out, and those things just keep coming out… But if you’re taught how long it takes to work for an iPhone, how many other things you could do with both that time and that money, and to overall have a much better idea of how much money is required to live “a good life.” And how expensive that can get. I think people would start spending their money very differently. In a way that would be more financially sustainable.

Anyway, to get back to your initial question: the importance of financial literacy. Well, let’s take compound interest for an example. Most people don’t understand that holding debt can get quite expensive. To the extent, that if you don’t pay it off (quickly enough) the cost of holding that debt might have cost the value of that debt several times over. This is stuff you would know how to calculate if you were financially literate. You’d be aware of the pitfalls.

Other things to look out for is knowing how financial products work, such as the lovely mortgages that ruined the 2008 economy. But even I have to admit that I only understood what had happened during the crisis after watching the movie The Big Short and I am supposed to be financially literate and understand personal finance quite well…

So yes, financial literacy can save you a lot of money and heartache, but it’s quite complex to be completely financially literate in the worlds of mobile banking, Klarna, hidden payday loans, Revolut and Bitcoin.

Photo by Mathieu Stern via UnSplash

Part 2 of this two part interview series with payment psychology expert Merle van den Aaker. Merle is the host of the incredible behavioral finance blog “Money on The Mind” . Part 1 can be found here