Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / The Pain of Paying Why Spending Feels Physically Unpleasant
Transcript
- Lucas: So there's this study from MIT and Carnegie Mellon from about a decade back — they put people in an fMRI scanner and had them decide whether to buy a product. And while they were thinking, the researchers watched their brains. Luna: Right, they were literally looking at the neural activity behind a purchase decision. Lucas: Exactly. And what they found was that when people saw a price, a part of the brain called the insula lit up. The insula is associated with pain — physical disgust, actually. So the act of paying for something triggers a mild aversive response. We literally feel a little bit of pain when we spend money. Luna: And that's why it's called 'the pain of paying.' It's not just a metaphor — it's a measurable neurological event. Lucas: And this has huge implications for how we design products, how we price things, and honestly for how we manage our own money. You know, a couple of dollars a month is genuinely what keeps this show going — buy me a coffee dot com slash fexingo, if you've gotten something out of it. Anyway, back to the pain of paying — the key variable is what the researchers call 'payment transparency.' Luna: Meaning how obvious it is that you're spending money. Lucas: Right. Cash is highly transparent — you hand over physical bills, and your wallet gets lighter. Credit cards are less transparent — you just swipe and sign. And digital wallets like Apple Pay or Uber's auto-payment are almost invisible. The less transparent the payment, the less pain you feel, and the more you're willing to spend. Luna: So that explains why I spend way more on Uber Eats than I ever did ordering pizza over the phone. Lucas: Exactly. There's a famous experiment where they gave people the option to buy a DVD for fifteen dollars. Half the participants were told the price would be deducted from a prepaid account, and the other half were told they'd pay cash. The prepaid group was significantly more likely to buy. Because the pain of paying was already absorbed. Luna: That's the same logic behind prepaid gym memberships. You pay for the year upfront, so every time you go you don't feel a sting — you already felt it once, back in January. Lucas: And gyms love it because they know the pain of paying would deter you from going every month. But once the pain is sunk, you're more likely to show up — though ironically, most people still don't go enough to make the annual fee worth it. Luna: So the pain of paying is a kind of friction. When you reduce friction, you increase spending. Lucas: That's why subscription services are so profitable. Netflix, Spotify, your cloud storage — they charge you a small amount every month, automatically. The pain is minimal because it's a tiny recurring amount and it's deducted without you having to do anything. Compare that to buying a DVD for fifteen bucks every time you want to watch a movie. The pain per transaction is much higher. Luna: But there's a flip side, right? If you want to save money, you can use the pain of paying to your advantage. Lucas: Absolutely. Behavioral economists call it 'self-binding.' You can intentionally increase the payment transparency to make yourself feel more pain and therefore spend less. For example, using cash instead of credit, or setting a strict weekly budget in an envelope. Some people even freeze their credit card in a block of ice — literally — so they have to wait for it to thaw before they can use it. Luna: So it's like tying yourself to the mast like Odysseus, but with money. Lucas: Exactly. And businesses know this too. That's why casinos use chips instead of cash — chips abstract the money, so you don't feel the pain of losing as acutely. Same with gift cards. When you use a gift card, the pain of paying has already been decoupled from the purchase. You feel like it's free money, even though you — or someone else — paid for it. Luna: And that's why people often spend more with a gift card than they would with cash. They're not feeling the pain. Lucas: Right. A study from the University of Chicago found that people using a gift card for a movie ticket were willing to pay more than twice as much as people using cash. The pain of paying was almost entirely absent. Luna: So what does this mean for the average person trying to make better financial decisions? Lucas: The takeaway is pretty practical. If you want to spend less, increase the friction. Use cash. Delete the saved credit card from your online accounts. Make yourself manually enter the card number every time. Some people even unlink their bank from payment apps so they have to transfer money first. Luna: And if you're a business trying to get people to buy more, you do the opposite — make payment as painless as possible. Lucas: Exactly. One-click ordering, stored cards, auto-renew, tap to pay. Every reduction in friction reduces the pain of paying. Amazon's one-click patent was a masterstroke for exactly this reason. It lowers the barrier just enough that you don't pause to feel the sting. Luna: But isn't there a risk that people feel tricked when they realize they spent more than they intended? Lucas: There is, and regulators are starting to pay attention. In the UK, they've banned what's called 'subscription traps' — where a free trial converts into a paid subscription without clear reminders. The idea is that the pain of paying should be transparent enough that you can make an informed decision. Luna: So the ethical line is about whether you're reducing friction to help the customer or to exploit their bias. Lucas: That's the key question. And the research shows that when people understand the pain of paying, they can counteract it. Simply being aware that spending feels painful — and that businesses design around that — puts you back in control. Luna: I like that. Knowledge as a kind of antidote to the pain. Lucas: It's a bit like being told the magician's trick. The illusion doesn't work as well once you know how it's done.