Twenty years ago, MIT Sloan professor Drazen Prelec found that people are willing to pay significantly higher prices — sometimes 100% higher — when buying something with a credit card instead of cash. This raised an obvious question: Why?
“One large issue in the background is whether the method of making transactions is itself neutral, with credit cards simply providing more security or access to liquidity, or whether the method actually messes with our psychology,” Prelec said. “It could be that a credit card is not simply taking consumers from A to B — from a desire to purchase to completing the purchase — but is actually, for example, creating that desire.”
Over the years, two competing theories have arisen in support of this latter notion. More prominently, researchers have proposed that credit cards reduce the pain of making purchases. “If you pay with a credit card you take an aspirin,” as Prelec put it. Alternatively, and less well-studied, credit cards could increase an individual’s motivation to spend. Though two sides of the same coin, these are distinctly different mechanisms with different implications.
To get at this distinction, Prelec and three colleagues — Sachin Banker, PhD ’13, at the University of Utah, Derek Dunfield, now at Facebook, and Alex Huang of the MIT Sloan Neuroeconomics Laboratory — recently used an fMRI machine to study whether brain activity differs during credit card and cash purchases. They found strong evidence suggesting credit cards actually increase the pleasure of purchases.
The study, “Neural mechanisms of credit card spending,” was published in February in Scientific Reports, a publication of Nature Research. It involved a small pool of participants who brought both a credit card and at least $50 in cash to the lab. They were placed in an fMRI and shown 84 products that were tailored to their interests and for sale at deep discount. Half of these could be bought with cash, the other half with credit. Participants could add products that they wanted to a shopping cart, and at the end of the study one item was randomly selected and the participant was asked to pay for it. (A few days later they received the product.)
The researchers used the fMRI to focus on three specific regions of the brain: two associated with reward and pleasure, and one associated with an array of negative emotions (pain, unpleasantness, rejection).
“What we found very, very clearly is that the opportunity to use a credit card specifically engaged known reward brain networks, and especially those that are involved in anticipation and craving,” Prelec said. These regions lit up with cards, but not cash, at the point when participants made a purchase. Strikingly, “these were the regions that have previously been associated with consumption of addictive substances,” like cocaine and amphetamines.
Sachin Banker, the paper’s lead author, explained “That is not to say that people are addicted to credit cards in the same way as drugs can be addictive, but rather that credit cards appear to get people to ‘put a foot on the gas,’ making them more eager or ready to spend money on products.” He went on: “It's possible that individual differences in how easily one tends to get addicted to things could be related to the misuse or overuse of credit cards.”
The researchers note in the article that this is an “exploratory study.” The sample included only 28 participants. Nor do these results rule out the possibility that credit cards reduce the pain of a purchase; they simply demonstrate that credit cards influence a neurological sense of reward. Whether and how these effects appear with much larger purchases also remains an open question, as the most expensive products in this study cost less than $20.
But Prelec and Banker both said the findings raise interesting, if open, implications and unanswered questions. Credit cards are now the default payment method for consumer purchases, and they are the fastest growing method of payment in the U.S. It is likely, too, that payment methods like digital wallets will overtake credit cards in the near future. What do these shifts to cashlessness mean for consumers, for economists, and for policymakers?
“You can’t say whether or not technology X will do something bad, but the mere fact of these technologies is a really important point for economists, who tend to think of people as having preferences about what they want to purchase and the transaction serving as a way to get there,” Prelec said. “But what if the instrument of that transaction creates habits and patterns that, at least for some people, might be dangerous? What if by making major decisions with a swipe or a click you are eliminating friction that people actually rely on?”