Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / How Your Brain Treats Cashback as a Reward
Transcript
- Lucas: So you buy a pair of sneakers for $120, and a week later your bank account shows a $10 cashback credit. Feels kind of nice, right? Like a little bonus. Luna: It does. It feels like I got away with something. Lucas: Exactly. But what if instead, the sneakers were $110 at checkout — same net price — and no cashback later? Most people would say the cashback route feels better, even though the math is identical. Luna: And that's irrational. But it's also predictable. Lucas: That's the core of today's episode. We're talking about why your brain treats cashback as a separate reward, not a discount. And how retailers have figured out that this little mental glitch makes you spend more. Luna: Where does this come from? Is it just a feeling? Lucas: It's grounded in something called mental accounting — a concept from Richard Thaler, the Nobel-winning behavioral economist. The idea is that we don't treat all money as fungible. We put it in different mental buckets. A $10 discount is money you never had. But a $10 cashback is money you 'earned' by making a smart purchase. Luna: So it flips the frame from 'I saved' to 'I gained.' Lucas: Exactly. And because it's framed as a gain, it feels like found money — which we're much more willing to spend again. A 2024 study from the University of Chicago tracked 5,000 shoppers over six months. They found that people who received cashback spent an average of 18% more per trip than those who got an equivalent instant discount. Luna: Eighteen percent — that's huge. So the cashback isn't just psychologically pleasing; it's actually driving more spending. Lucas: Right. And retailers know this. Think about Amazon — their Prime Rewards card gives you 5% cashback. You buy a $400 laptop, you get $20 back. That $20 feels like a little victory. But if Amazon just cut the price to $380, you'd barely register it. In fact, you might wonder why it wasn't cheaper. Luna: There's also the timing element. The cashback arrives later, so it's decoupled from the pain of paying. By the time you see the credit, the sting of the purchase is gone. Lucas: That's a crucial point. In behavioral economics, there's this idea of 'transaction utility' — the pleasure or pain of the deal itself, separate from the product. A discount happens at the moment of purchase, so it's bundled with the price. But cashback arrives as a separate event, so it's processed as pure positive. Luna: So it's like getting a gift from your past self. Lucas: Exactly. And because it's a gift, you're more likely to blow it on something frivolous. I've seen data from cashback apps like Rakuten and Honey — users tend to redeem their cashback within two weeks, and 70% of that redemption goes to discretionary categories like dining out, entertainment, or another purchase on the same app. Luna: So the cashback itself becomes a second transaction. The retailer effectively got you to buy something twice. Lucas: That's the loop. And it's not just online — Target's RedCard gives 5% off instantly, which is a discount, not cashback. But they tried a cashback model briefly in 2022, and internal data showed that cashback users had a 12% higher average basket size than the instant discount group. Luna: So why did they go back to the instant discount? Lucas: For them, the cashback likely had higher operational costs — they had to track and credit every purchase. But also, the instant discount attracts more customers upfront. Cashback is better at increasing spend per customer; instant discount is better at driving first-time purchases. Luna: So there's a tradeoff. Use cashback to milk existing customers, use discounts to acquire new ones. Lucas: Exactly. And this is where the psychology gets really interesting. There's also a phenomenon called the 'illusion of earning' — people feel like they've done something to deserve the cashback. They made a smart choice. And that feeling of competence makes them want to repeat the behavior. Luna: It's almost like gamification. You're not just buying; you're winning. Lucas: Right. And some companies have taken that further. There's a fintech app called Yotta that uses a lottery mechanic — you get entries for every dollar spent, and you can win cashback. It's literally gambling-like. But even without the lottery, the core effect holds: cashback feels like a reward for virtuous behavior. Luna: Okay, but what about the flip side? Does cashback ever backfire? Lucas: It can, if the customer feels manipulated. Some studies show that if the cashback is too large — say 20% — people become suspicious. They assume the base price was inflated. But a modest 5% or 10% feels like a genuine bonus. Luna: So there's a sweet spot. Too small and it's not worth the mental effort. Too big and it feels like a trick. Lucas: Exactly. And this is why you see so many credit cards offering 1.5% or 2% cashback — it's enough to feel like you're getting something, but not so much that you question the system. Luna: Speaking of credit cards — there's also the 'payment decoupling' effect. You swipe a card, and the cashback comes weeks later. That delay further weakens the link between spending and cost. Lucas: Right. And if you're using a cashback card, you're essentially earning a rebate on everything. That can lead to a subtle increase in overall spending. A 2019 study from MIT found that credit card users who earned cashback spent 12% more than those who used debit cards, even controlling for income. The cashback acted as a psychological license to spend. Luna: So the very tool that's supposed to save you money actually makes you spend more. Lucas: If you're not careful. But the awareness is half the battle. Once you know that cashback is essentially a marketing mechanism designed to exploit your mental accounting, you can make more deliberate choices. Luna: I wonder if there's a way to hack it for yourself. Like, set up automatic transfers from your cashback to a savings account, so it never hits your checking. Lucas: That's a great strategy. You're using the same mental accounting — just in your favor. You're putting that 'found money' into a different bucket, so you don't spend it. Luna: And speaking of putting money where it matters — I know we talk a lot about how companies use these tricks, and we try to expose them. But honestly, if today's episode made something click for you, there's a small way to keep this show going. It's ad-free, and it stays that way because of listeners who chip in. Lucas: Yeah, if you found the cashback breakdown worth a coffee, you can find us at buy me a coffee dot com slash fexingo. That's a simple link — no tiers, no gimmicks. Just a way to say this kind of content matters to you. Luna: And even if you don't, we're glad you're here. Now back to the psychology — Lucas, you mentioned that cashback can feel like a reward. But what about the opposite? What about fees — are they processed the same way? Lucas: Great question. And that's actually a perfect segue into our next episode, where we'll talk about the 'pain of paying' and how surcharges feel different from price increases. But for today, the takeaway is: cashback isn't free money. It's a behavioral lever. Know it, use it, or be used by it. Luna: Well said. I know I'll think twice before redeeming my $3.50 from the grocery run. Lucas: And maybe that's the most rational thing you can do.