Latest / Behavioral Economics with Fexingo: Decision Making, Bias, and How People Really Spend / Why Your Brain Treats Cashback as Income Not a Discount
Transcript
- Lucas: Luna, you ever notice how different it feels to get ten dollars cashback on a purchase versus seeing the same item marked down by ten dollars? Luna: Absolutely. With cashback, I almost feel like I earned something. With a discount, I just feel like I paid less. But the net effect on my wallet is the same. Lucas: Right. And that gap in how we feel has a name in behavioral economics: it's called the cashback illusion. It's a specific form of mental accounting where we categorize the cashback as income — a little bonus — rather than as a price reduction. Luna: So we're basically tricking ourselves into spending more because we treat the rebate as found money? Lucas: Exactly. And there's a really clean experiment from the University of Chicago published last year that shows this. Researchers gave shoppers a choice: buy a twenty-dollar item with a five-dollar instant discount, or buy it at full price but get five dollars cashback after the purchase. Same net cost: fifteen dollars. Luna: And people preferred the cashback? Lucas: Not just preferred it — they were significantly more likely to make the purchase when cashback was offered. And once they got the cashback, they were more likely to spend it on something else, often an indulgence, whereas the discount group just pocketed the savings. Luna: That's fascinating. So the cashback actually changes what we do with the money we 'saved.' It's not just a framing trick — it alters real spending behavior. Lucas: Precisely. And retailers and credit card companies know this intimately. That's why you see so many 'cashback rewards' rather than 'instant discounts.' They want you to feel like you're getting a bonus, not a lower price, because that feeling makes you more likely to keep spending. Luna: So it's a classic mental accounting error. We have separate mental buckets for 'income' and 'discounts.' Cashback lands in the income bucket, so we feel richer, and that feeling loosens our purse strings. Lucas: Right. And there's a second layer to this: the timing. Cashback usually arrives after the purchase, often with a delay. That delay breaks the link between the payment and the reward in your mind, so you don't experience the full 'pain of paying' that would normally curb your spending. Luna: So it's a double whammy: you don't feel the sting of the full price at the register, and then later you get a little dopamine hit of 'free money.' No wonder credit card companies push cashback so hard. Lucas: Exactly. And speaking of which — if you find these insights into how your brain spends money useful, and you'd like to help us keep this show ad-free and independent, you can support us at buy me a coffee dot com slash fexingo. Even a small contribution helps us keep digging into these topics without outside pressure. Luna: Yeah, it's a simple way to say you value this kind of deep dive. And we really appreciate it. Lucas: So back to the cashback illusion. One of the most striking findings from that Chicago study was that people who received cashback were more likely to spend it on hedonic items — like a fancy coffee or a movie ticket — whereas those who got an instant discount were more likely to save the difference. Luna: That makes sense if you think of it as a windfall. We treat windfalls as mad money. Lucas: Right. And that's precisely why some retailers have started offering deferred cashback rather than point of sale discounts. They want to maximize that windfall feeling. Apple, for example, offers cashback through its Apple Card — you get two percent back on every purchase, but it doesn't hit your account until the next day. Luna: So you're less likely to mentally net it against the purchase. You just see the full charge and then later a separate deposit. Lucas: Exactly. And your brain codes that deposit as income. Now, there's a parallel phenomenon in the travel industry. Think about airline miles or hotel points. Those are basically cashback with extra steps. But because the redemption is so far removed from the earning, people often overspend to earn points they never actually use. Luna: Yeah, the breakage rate — the percentage of rewards that go unredeemed — is huge. I've seen estimates that about twenty percent of airline miles expire unused. So the illusion runs both ways: you spend more to earn them, and then you don't even enjoy the reward. Lucas: Right. And that's the dark side of the cashback illusion. It's not just a harmless quirk — it can lead to significant overspending. If you're trying to budget, recognizing this bias is actually quite powerful. Luna: So what's the antidote? How do we mentally reframe cashback to avoid the illusion? Lucas: The simplest trick is to mentally net it against the purchase immediately. When you get ten dollars cashback on a fifty-dollar item, tell yourself you paid forty dollars. Don't let your brain put that ten dollars into a separate income bucket. Or, even better, automatically sweep any cashback into a savings account before you can spend it. Luna: That's a great practical tip. Treat it like a discount, not a bonus. And if you can't do that mentally, let automation do it for you. Lucas: Exactly. And there's another angle here that I find really interesting: how the cashback illusion interacts with the pain of paying. Remember that episode we did on the pain of paying? Cashback effectively dulls that pain because it decouples the cost from the benefit. Luna: Right, so you're more likely to buy things you don't need because the transaction doesn't feel as costly. And then the delayed cashback gives you a little reward that reinforces the behavior. Lucas: Exactly. And credit card companies have optimized this. They know that if they can reduce the pain of paying at the moment of purchase, they can increase transaction volume. That's why you see so many 'double cashback' promotions or 'bonus cashback on select categories.' They're deliberately amplifying the illusion. Luna: So the question is: should we avoid cashback cards altogether? Or can we use them wisely? Lucas: I think the answer is nuanced. Cashback cards can be financially beneficial if you pay your balance in full every month — you're effectively getting a discount on everything you buy. But if you carry a balance, the interest you pay will almost certainly outweigh the cashback. And even if you pay in full, you still have to guard against the behavioral effect of spending more because of the reward. Luna: So it's a tool that requires self-awareness. Know the illusion, and then you can decide whether to play the game or opt out. Lucas: Exactly. And that's really the takeaway from this episode. The cashback illusion is another reminder that our brains don't process money like a spreadsheet. We categorize, we separate, we feel. And once you see the pattern, you can make more intentional choices. Luna: Alright, well next time you get an email saying 'You've earned cashback!' — pause and ask yourself: is this a bonus or just a delayed discount? Lucas: That's a great way to put it. Thanks, Luna. And thanks to all of you for listening. We'll be back next time with another bias to unpack.