Saving Cash: A Quantitative Analysis of the Relationship between Loss Aversion and Payment Methods.

Abstract

Background: The past decade has seen the rapid development of payment system technology which is central to this research. However, there has been little quantitative analysis of the relationship between payment mode and loss aversion. The purpose of this study was to probe any differences in the use of physical and digital money and to measure these differences on the scale of loss aversion. It was hypothesized that people would take higher financial risks, spend more, and therefore have a lower level of loss aversion when paying with digital money. Methods: Eighty-one Irish participants volunteered for this experiment. The analysis was carried out through a commonly used loss aversion experiment: A decision-making task consisting of a series of low-stake, win-lose, 50-50 gambles, which participants were asked to accept or reject. Half of the participants used digital money and half-used physical money. Results: A 2 x 3 ANOVA was conducted between subjects to test whether people were more loss-averse with physical or digital money. It was found that individuals, specifically males, accepted significantly more gamblesin the digital condition than the participants in the physical condition. (F (2, 96) = 4.5, p = <0.05). Conclusion: The results of this research suggest that digital payment becoming the primary payment system could have an impact on human behaviour. This behavioural difference can be seen by higher levels of risk being accepted when using digital money, particularly by the male portion of the sample population. Less awareness when spending digitally may lead people to worsen their financial positions. Therefore, the current move in society away from physical money should be carefully scrutinized and precaution should be taken as payment systems become cashless.