When cash costs you: The pain of holding coins over banknotes

We hypothesize that the physical characteristics of cash lead to differences in “pain of holding” which influences spending. In one field study (rural India) and two controlled experiments (N = 1710), we tested that hypothesis by endowing people with coins or equivalently valued banknotes and measuring their pain of holding and spending. Holding denomination constant (e.g., $1 coins vs. $1 banknotes), participants reported a greater pain of holding for coins (vs banknotes) which in turn increased spending. These findings were consistent across three incentive-compatible experiments using a range of contexts (spending/donation), populations (Americans/Indians), and currencies (USD/INR). There was no evidence that coins were spent more than banknotes because of lower perceived purchasing power. Our findings suggest that the pain of holding contributes to under-saving, which may be especially problematic among vulnerable populations who rely on cash. Conceptually, we shed new insight on the denomination effect (greater spending of smaller than larger denominations) and the pain of paying (the aversive experience of spending money). Practically, we provide recommendations for practitioners who wish to encourage donations, spending, or saving.