August 21st, 2007

From the September 2007 issue of The Atlantic:

Pound-Wise, Peso-Foolish
Before the Mexican government removed three zeros from its currency in 1993, anyone who wanted to know what it felt like to be a millionaire could hop across the Rio Grande and convert dollars into pesos. But tourists should beware: According to a study by three marketing professors, feeling like a millionaire tends to make you spend like one. The authors asked subjects in Hong Kong to imagine living on an after-tax budget of 9,000 Hong Kong dollars a month and to estimate how much they would pay each month for things like eating out, shopping for clothes, and going to movies and bars. The subjects were then asked to imagine living on 500 “Tristania” dollars, a fictional currency worth 18 Hong Kong dollars apiece—a budget equal in real value to their Hong Kong budget. When drawing up budgets, the subjects scrimped and saved their Tristania dollars but spent their Hong Kong dollars much more freely. This effect reversed when the authors made the Tristania dollars the less-valuable currency. This “money illusion” may explain Europeans’ false perception that prices rose dramatically when the euro replaced zero-laden currencies like the Portuguese escudo and the Italian lira.

—“On the Perceived Value of Money: The Reference Dependence of Currency Numerosity Effects,” Klaus Wertenbroch, Dilip Soman, and Amitava Chattopadhyay, Journal of Consumer Research (PDF)
Atlantic article at http://www.theatlantic.com/doc/200709/primarysources#pound

journal article abstract at http://www.journals.uchicago.edu/JCR/journal/issues/v34n1/340101/brief/340101.abstract.html