Denomination effect

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The denomination effect is a form of cognitive bias relating to currency, suggesting people may be less likely to spend larger currency denominations than their equivalent value in smaller denominations.^[1] It was proposed by Priya Raghubir, professor at the New York University Stern School of Business, and Joydeep Srivastava, professor at University of Maryland, in their 2009 paper "Denomination Effect".^[2][3]

Raghubir and Srivastava conducted three studies in their research on the denomination effect; their findings suggested people may be more likely to spend money represented by smaller denominations and that consumers may prefer to receive money in a large denomination when there is a need to control spending. The denomination effect can occur when large denominations are perceived as less exchangeable than smaller denominations.

The effect's influence on spending decisions has implications throughout various sectors in society, including consumer welfare, monetary policy and the finance industry. For example, during the Great Recession, one businessman observed employees using more coins rather than banknotes in an office vending machine, perceiving the customers used coins to feel thriftier. Raghubir and Srivastava also suggested the effect may involve incentives to alter future behavior and that a large denomination can serve as a mechanism to prevent the urge to spend.