From the September 2007 issue of The Atlantic:

[randomness]

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

Comments

[(Anonymous)]

That's really nifty! It makes perfect sense-- in addition to the richer/poorer perception, weaker currencies involve more dealing with numbers that are entirely abstractions. Sure, we can "know" that 5000 Weaks is the same as 5 Strongs, but we have a much more intuitive sense of 5 than of 5000.

This suggests that decisions about when to eliminate the last digit (ie pennies, although that wouldn't actually get rid of the last digit) have another consequence: they probably change spending patterns. I suspect that that supports the position of those of us who think that the poor would benefit from eliminating pennies--it seems likely that spending would decline among the poor, which would probably be in their interest.

--Adam

[emilymorgan.livejournal.com]

That's really interesting!