Currency Numerosity Effects on the Perceived Value of Transactions

Abstract

This paper examines the impact of currency numerosity on consumer perceptions of the value of transactions. It extends current theorizing on money illusion in several important ways. We propose a conceptualization that not only considers the nominal prices faced by consumers but, in line with economic and psychophysical theory, also considers the effect of relevant reference standards of evaluation (e.g., a consumer's income or budget). Second, we suggest that consumers rely on the numerosity heuristic in evaluating prices relative to income. Third, we propose and test two alternative computational mechanisms for this evaluation process, the difference between income and prices and the ratio between the two. Our conceptualization not only accounts for recent findings on effects of nominal variations in prices but, in addition, predicts new and reverse effects when both incomes and prices are uniformly rescaled in a new currency. We test our propositions in six experiments. Our research extends current thinking by providing a more parsimonious and comprehensive process explanation for how consumers judge the value of money. We discuss implications of our findings in the context of the introduction of Euro currency on January 1, 2002.