How to Think About Money, Choose Your Hometown, and Buy an Electric Toothbrush: A New Freakonomics Radio Podcast

cartoon headsOur latest podcast is called “How to Think About Money, Choose Your Hometown, and Buy an Electric Toothbrush.” (You can download/subscribe at iTunes, get the RSS feed, or listen via the media player in the post. You can also read the transcript below; it includes credits for the music you’ll hear in the episode.) It’s another installment of our FREAK-quently Asked Questions, in which Stephen Dubner and Steve Levitt answer questions from you, our readers and listeners. 

Steve Reda, a 22-year-old in the Washington, D.C., area, asks if kids today are more careful using credit as opposed to cash. (It’s a question that makes Dubner recall his salad days, back when he fell in love with economics and the “mental accounting” research done by Richard Thaler, Daniel Kahneman and Amos Tversky.) This leads to a conversation about spending in general, which leads to Levitt’s counterintuitive advice for the youth of today (advice passed down from Milton Friedman to José Scheinkman and on to Levitt):

LEVITT: I think, so often, young people don’t consume as much as they should. And they end up really scrimping and saving, and wasting tons of time.

(Put down the pitchforks, people! Levitt defends his advice convincingly.)

This episode also answers Joe Westhead’s question about how an economist chooses a hometown. Turns out Levitt and Dubner prioritize different things when picking a place to live.  

P.S. We do these FREAK-quently Asked Questions episodes regularly — you can find earlier ones here, here, here, here, here and here — and your questions are great, so please keep them coming!

Audio Transcript

[MUSIC: John Philip Sousa, “Manhattan Beach” (from J.P. Sousa’s Marches and Dances)]


Stephen J. DUBNER: Hey Levitt, what are your very favorite three letters in the English alphabet?


Steven D. LEVITT: I have no idea.


DUBNER: What do you mean you have no idea, you must have three favorite letters.


LEVITT: You mean like in a row that spell a word?


DUBNER: Yeah, maybe. I’m just seeing what comes to mind. How do you like F?


LEVITT: F’s good.


DUBNER: Give me an A.




DUBNER: Give me a Q.

LEVITT: Oh FAQ, I didn’t know what you were talking about.


DUBNER: What’s it spell?




DUBNER: And what’s it mean?


LEVITT: It means I’m heavily confused right now.




ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO. Here’s your host, Stephen Dubner.

[MUSIC: Heavy G and the Boogaloo Communicators, “Broad Street Boogaloo” (from: Makin’ It Happen)]


DUBNER: Every now and again, Steve Levitt and I ask you, our listeners and readers, to send us questions. And then we try to answer them on this podcast. It’s called FREAK-quently Asked Questions.


DUBNER: Okay, so Levitt let’s take some question from readers and listeners of this fine Freakonomics Radio podcast. Okay, are you ready for a couple?




DUBNER: This is from a fellow named Steve Reda, or Reda, I guess. He says, “This morning I was reading an article on how credit card spending is making us ‘irresponsible’ because it removes the ‘pain’ of paying with cold, hard cash. I found this assertion to be untrue for those of my age group. I am 22 years old,” Steve writes, “a full-time quality assurance analyst at a government contractor outside of Washington D.C. For me and my colleagues we’ve found that on the rare occasion we actually have cold, hard cash it actually feels almost like spare money. It doesn’t come up in our bank accounts since we’ve already either withdrawn it some time ago or accepted as repayment for something else. It seems to be a widely accepted concept that credit cards are causing us to be poor spenders, but could it be that this so-called irresponsibility of credit cards is simply an issue for those who grew up using hard cash instead of hard plastic?” Levitt, I love this question. This is exactly the kind of question that got me interested in economics long ago, the work of Richard Thaler, and before that Kahneman and Tversky and mental accounting and all this stuff. So what do you say? First of all, let’s address Steve’s assumption about is it true that people spend credit and cash differently, and maybe has the paradigm shifted for the younger generation now?


LEVITT: So look, what do I know, I don’t know anything but it sounds completely and totally wrong to me. It just seems completely off. I mean, I believe firmly in this idea of mental accounting, that people don’t think of a dollar as a dollar, they allocate money differently. But everything we know about the intersection of psychology and economics says that if you delay paying it doesn’t hurt you as much, and clearly the paying would be seen as the painful part. The consumption is the reward, and the paying is the punishment. And like taking paying for gas as a good example. People talk incessantly about the price of gas and how expensive gas is. And the reason is because they have to go to the pump every couple of weeks and actually watch sixty dollars roll up on the gas pump, whereas other things that are more invisible, which might be much more like your cell phone bill, which might $50 or $100 per person, but it’s invisible because you automatically directly pay it doesn't seem like anything. So I just think it’s just completely backwards. I think that if you actually have to pull the money out of your pocket, and you have to dole out those bills it’s just got to be more painful and more real than flashing a credit card.


DUBNER: I see what you’re saying, and I probably agree with you. And look there’s a lot of research on the cash versus credit, so here’s a paper called “Always Leave Home Without It: A Further Investigation of the Credit Card Effect on Willingness to Pay.” “Willingness to Pay” being a phrase that you economists use a lot, which nobody else does. It says that in studies involving genuine transactions of potentially high value, we show that willingness to pay can be increased when customers are instructed to use a credit card rather than cash. The effect may be large, up to 100 percent, and it appears unlikely that it arises due solely to liquidity constraints. Can you translate that a little bit from economist-speak to us? What does that mean: “...appears unlikely that it arises due solely to liquidity restraints?”


LEVITT: Well the first part, in English, means that if you try to get somebody to buy something with a credit card or cash they’ll pay you a lot more with a credit card than cash. And by liquidity constraints, I think what they’re implying is sometimes you just run out of money and can’t buy something even if you want to. And they’re saying the way they designed this experiment, it wasn’t that you ran out of money so you couldn’t buy it, it was this other psychological factor about the deferring of the paying.


DUBNER: Let me hear an anecdote let’s say, show me the way in which you do mental accounting and let’s analyze that a little bit.


LEVITT: The one example of mental accounting that I do for sure is if I buy a big object, say a computer, a nice laptop computer—versus an electric toothbrush which costs me $20. And it comes time to decide how to have it shipped. I might want the electric toothbrush just as much the next day as I want the laptop the next day, but I’m much more likely to pay an extra $30 or $50 in shipping to get the laptop sent to me. And I would never agree to have a $50 shipping charge put on top of a $20 toothbrush. But technically in economics if I really do want that toothbrush the next day, if the utility that I’m going to get out of the toothbrush the next day is as high as the utility I’m going to get out of that laptop I should be willing to pay the shipping charge equally on the two different purchases. And almost everybody does this. And it is really a violation of a simple, basic economic principle and one that fits in very well with the idea of mental accounting.


DUBNER: We’ve talked on this program before about Danny Kahneman, yes? A wonderful human and brilliant guy. And a lot of this mental accounting was popularized by Richard Thaler, your colleague at University of Chicago, really grew out of Kahneman and Tversky work. I think one thing that makes Danny so appealing as a scholar is that he identifies these flaws in himself as much as in other people. He doesn’t pretend to be the guy that’s smarter than everybody else. He was saying a great example of this was when you buy a new house, and let’s say you spend $700,000 on this house, and the house doesn’t have furniture, or curtains, and you have to buy that stuff, and you look at the total bill under one scenario and it’s $100,000 for all that stuff. And you say well that’s not so much. I just paid $700,000 for the house. Whereas if you were maybe to buy it piece by piece or not right after you bought the house, or if it came furnished and you were buying the furniture separately you’d consider $100,000 exorbitant. But you’re much more likely to do it when it’s proportionately relatively small to what you just bought. So I asked Danny, you know, have you ever known anybody who’s really done that? And he said, “oh yeah, I did.” So it’s obviously easy for even smart people to make that kind of mistake, but is it a mistake, or is there some way in which that kind of mental accounting is good for us, helpful, fruitful in some way?


LEVITT: You know, that’s a great question, and I don’t know the answer to that. Many of the “defects” people have where people deviate from rational behavior you can attribute to either to the complexity of the problem or simple rules of thumb which usually work but occasionally backfire. And you know, that’s probably true of mental accounting. There probably are situations where in general I can save a lot of time and effort and heartache by following rules of thumb which are consistent with mental accounting. But I’ve never really seen the problem talked about in that way. So I’ve got to say that’s one of those good questions that off the top of my head I don’t know the answer to.


[MUSIC: The Diplomats of Solid Sound, “Hot Stick” (from: Instrumental, Action, Soul)]


DUBNER: Coming up on Freakonomics Radio: what kind of economist will tell you that young people should be spending more money and saving less?


LEVITT: I think so often young people don’t consume as much as they should. And they end up, you know, really scrimping and saving, and wasting tons of time.


DUBNER: Also, some of the questions we didn’t get to:


ANNOUNCER: Do cardboard cutouts of policemen really deter theft?


ANNOUNCER: How many sexual predators still have their foreskins?


ANNOUNCER: From WNYC: This is FREAKONOMICS RADIO. Here’s your host, Stephen Dubner.


[MUSIC: Mark J. Scetta, “Three Men In A Tub”]

DUBNER: Welcome back to FREAK-quently Asked Questions, in which my economist friend Steve Levitt and I answer your questions. Sometimes we’ll ask each other a question…


DUBNER: So Levitt, let me ask you this, your oldest kids and mine are about the same age, so in five, six, seven years we’re going to be sending them off to college hopefully. What’s the financial or spending advice you give your kids going out into the world for the first time. Maybe you give them a debit card, a credit card, you load them up with cash. How do you teach them about money in the real world?


LEVITT: You know, I care so little about money and I’ve always cared so little about money, and I’ve never really wanted anything, that I’ve certainly started as a parent, to basically tell kids that nothing’s really worth anything, and you don’t really need anything. So hopefully my kids will go into the world putting almost no value on material possession. Okay, maybe I fail at that. But if I succeed at that, then there’s really no lesson about anything. You give them the credit card, they don’t want anything. If they’re in a jam, they use it. Now, on the flip side I’ve also probably spoiled my kids by giving them what they want because they don’t really want anything. And so my kids probably have almost no understanding of the meaning of a dollar and what hard work entails. So, I don’t know. I think my kids might be in trouble.


[MUSIC: Mark J. Scetta, “Three Men In A Tub”]


LEVITT: One of the best pieces of financial advice I ever got was from a senior economist at Chicago when I got here named José Scheinkman. What he told me is actually something that he said Milton Friedman told him. And what he said was that you should spend more and save less. I think what happens to young people is that young people are always told to be thrifty, to save, save, save. But Jose’s point was this, you’re never going to be poorer than you are today. This was when I was a first-year professor at the University of Chicago. Your salary will only go up, your earning power will only go up. And so you shouldn’t be saving now, you should be borrowing. You should be living today in much the way that you’ll be living in 10 or 15 years and it’s crazy to actually be scrimping and saving, which is what at least someone like me who was brought up in a middle class family was taught to do. And you know, there was a time, I remember for many years where I would refuse to buy anything in an airport out of the sense that it was too expensive, it was frivolous to buy a soda in the airport for $3. And then eventually I said, well no, that’s crazy. I’m going to give myself the freedom to anything below $5, I’m just not going to worry about it. If something is below $5 and I want it I’m just going to buy it. And over time that number has gone up and up and up. I mean obviously you and I had some success with the books and stuff so we have a bit more money than we thought we would have, but just in general I think young people don’t consume as much as they should. And they end up, you know, really scrimping and saving, and wasting tons of time. I mean, if you think about how people spend hours and hours to save a few dollars it makes no sense, right? If you have any value on your time, you shouldn’t go across town…


DUBNER: Can I say, so this advice sounds like some of the worst advice I’ve ever heard. Except maybe in your very narrow situation, because what you’re leaving out there is you’ve already made a massive investment in your education, and now your investment is starting to pay off returns, and dividends and basically an annuity. But not everybody’s in that situation. In fact, most people aren’t in that situation, right? So you had basically turned yourself into a walking human annuity by the time you were whatever 27, 28 years old, unless you totally screwed up. And knowing that I can see why you might want to consume more than you had been conditioned to do so. But absent those facts, you don’t want to do what you’re describing, or do you? In other words, a lot of people now, they get their first good job at let’s say 24, 25, 28, 30. Did they have the sense that you would have had as a young academic at that age that they’re just going to be on an upward trend? I think most people don’t feel that.


LEVITT: So, the actual question that you asked had to do with your kid going off to college. So college students, people who are going from  graduate from college are never poorer than they are in college, assuming that their parents aren’t helping them that much. And if you look at the overall earnings trajectory of college graduates, it goes up for 25 years, 30 years before it starts going down. So in general what I’m saying is true, that people get richer over their life cycle. And so what we expect they should do is they should not save when they’re young. They should start saving in their thirties, and forties, and they should dissave when they’re in their sixties  and seventies, they should run down their savings. So I stand by what I’m saying. I think people are too thrifty, not thrifty enough.


[MUSIC: Donvision, “Flip Flop”]


DUBNER: Here’s a question for Joe Westhead, the subject line is “The economics of choosing a hometown.” He writes, “Hi chaps.” I don’t know if anybody’s ever called us chaps before. I like that. Do you feel chappy?


LEVITT: He must not be American. Is he American?


DUBNER: Oh, can’t tell from any of his identifiers. Let’s read the email. Alright,“So here’s a question I’ve been pondering,” he writes, “perhaps you’ll find it interesting. I’m one of the growing number of people who can work remotely from a laptop as long as I have internet. I’m free to living in any city I like.” Presumably any non-city too. “How would an economist go about choosing a place to live, attempting not to be biased by prejudice. How should you quantifiably choose a hometown? Joe.” What do you say, Levitt? If you were starting from scratch, you didn’t have to be any particular place, what are the dimensions, and the metrics, and the yardsticks that you begin to assemble to figure out the place, the kind of place, and the actual place you want to live?


LEVITT: So when economists talk about location they use the word amenities to mean the kinds of things that people are willing to pay for. So access to theater, or to nature, or to a good bar scene or things like that. And the thing about amenities in cities is that it’s a market, right? So that the places that have lots of amenities like San Francisco and New York City also tend to be extremely expensive because space is scarce and people will pay to be close to those amenities. So the problem you face when you try to decide where to live is to figure out how do you find a way to a city or a location that has a lot of the amenities you like, but not a lot of the amenities that you don’t really care about. So an interesting example is that couples who have no children don’t want typically to live in places that spend a lot of money on education, that have very good school systems. And so consequently there’s a lot of self-selection away from fancy suburbs by people who are childless. I mean, maybe also in addition fancy suburbs don’t have a lot of the fun things to do that childless couples are looking for. There’s been some interesting research done on homosexual couples and where they tend to live. They tend to be more affluent than the typical person. And they tend to like different sets of amenities and not have as many kids. And it turns out that if you want to figure out where all the nice places in the country are, you just go to the places where the homosexual couples end up because they tend to be concentrated in the places that everyone else is willing to pay a whole lot of money to go live in. So, I think that’s what…was Joe the name of that fellow?


DUBNER: Yeah, Joe.  So if you’re looking…Yeah, Joe, so he should look where there are a lot of gay couples living?


LEVITT: Well, you know, but not so clear, because a lot of what you’re buying in a city is proximity to places to work. So I was actually like you, I was surprised he used the word city.


DUBNER: So let me ask you this, you live in a city, in Chicago. It’s probably not the place that you would have picked absent the job at the University of Chicago, though, right?


LEVITT: Right, so I wouldn’t live in Chicago probably if I didn’t teach at the University of Chicago. And I wouldn’t live in Hyde Park.


DUBNER: You probably would even live in a city even would you? Or would you?


LEVITT: No, I would live in a suburb for sure, because pretty much everything I like is in suburbs. You know, I like fast food, I like golf courses, I like big houses and big yards and stuff like that, so, yeah, pretty much that’s what I like.


DUBNER: You like making U-turns across six-lane highways. You like Dairy Queens, right?


LEVITT: I’m not big into culture.


DUBNER: You’re not. You’ve never been in a museum in your life, have you?


LEVITT: Not very often, no. Not usually willingly. So I’m not really the kind of person who would pay a lot of money to be close to a central city.


[MUSIC: Dorian Charnis, “Modern Bebop”]


DUBNER: So let me ask you this, to me one of the great…Look, I live in New York, I never planned to live in New York City, but I do now and I’ve lived here a long time, and I’ve come to love it. To me, one of the unexpected benefits, unexpected to me only because I was naïve, of living in a city, especially New York, is propinquity, the density of people, and ideas, and stuff. Now I don’t really like being around people that much, or being around a lot of people, but I like being in a place where you’ve got that density and propinquity because the spillover effects are massive. So, I wonder if you might feel the same even though you think you don’t like cities too?


LEVITT: I think you make a good point which is that location really matters. And think about it in terms of academics. So who do I write my papers with? I tend to write my papers with the people that I go to lunch with. And I go to lunch with the people whose offices are right by me. And you can see how much distance matters. I mean, even one floor, or certainly a building has an enormous impact on who you interact with. And it’s interesting that this somehow persists even in a world in which so much occurs virtually just because anything that takes work, any social interaction that takes work tends not to happen.


[MUSIC: Dorian Charnis, “Modern Bebop”]


DUBNER: Getting back to Joe’s question about, you know, how you pick the place to live, what’s, like, if you're going to look for a place to live, what’s one thing that you have to have in that place, let’s say? Or one thing that maybe not have to have but one thing that to you is a really good sign post or arbiter that this is a place that I can live?


LEVITT: You’re saying about me personally?


DUBNER: Yeah, yeah, yea.


LEVITT: Well for me right now it’s all about the kids’ schools. I care more about the kids schools than anything else.


DUBNER: Alright, that’s kind of a standard, standard middle-class parent answer, no offense. Let’s pretend you’re a different you. Let’s say you have your preferences that you do have as Steve Levitt, but you’re not thinking about a family right now, you’re thinking about you. What’s, what’s the opposite of the canary in the coalmine.  What’s the…I’ll tell you what mine is. Here’s the thing, I could never live in a place that doesn’t have a good diner. Because I feel like even if I don’t want to go to the diner, I like what a diner represents. A diner is like all things to all people, you know, it kind of, it democratizes the whole idea of eating. So you have like, in your neighborhood, your Salonika, your Greek diner, where you like to get you steak and eggs and bring home your bone for the dog, right? That’s the kind of thing that has to exist for me in a place where I want to live. I like the idea there’s a place where people of all different kinds can get together and if you’ve got to have breakfast at five in the afternoon we understand, if you have to have moussaka for breakfast we can arrange that. So what about for you?


LEVITT: Wow, you’re much more…


DUBNER: Hungry?


LEVITT: Multilayered than I am. I think, I mean, because I think about of all the things I do, the only thing that I really would be nuts about would be if there wasn’t a place where I could play golf easily.


DUBNER: So in a nutshell, we’re going to say to Joe you want to move to a place that has a lot of gay couples, enough wealth that you can handle it, golf and a good diner.


LEVITT: Can Joe just move into you extra spare bedroom?


DUBNER: I don’t know, if I had a spare bedroom you’d put a putting green in. But yeah, we could offer that.


[MUSIC: All Good Funk Alliance, “Timely Convo” (from: Social Comment)]


DUBNER: So that does it for this edition of FREAK-quently Asked Questions. Thanks for listening and thanks especially for sending in your questions. Here are some of your questions that we didn’t get to -- and, in some cases, I’m sure you’ll understand why …


ANNOUNCER: Is central heating a primary cause of obesity?


ANNOUNCER: Why do south Asians dominate the hotel/motel business?


ANNOUNCER: Why do Corporate Honchos and Mafia dress themselves in expensive suits?


ANNOUNCER: Are people who "care" about the environment more or less likely to use a toilet cover?


ANNOUNCER: Does being able to swim increase your likelihood of dying due to drowning?


ANNOUNCER: Why is it that runners of East African descent tend to dominate distance running, but runners in the US and Jamaica, of West African descent, tend to dominate sprints?


ANNOUNCER: Do cardboard cutouts of policemen really deter theft? How about traffic violations?


ANNOUNCER: How many sexual predators still have their foreskins?



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  1. CharlesJ. says:

    On the topic of were you would want to live is such a broad question, but most people in my field tend to like small towns due to cheap living and a less stressful enviroment. I build wind turbines. please excuse my spelling and grammar errors. I have never been vary good in those particular areas. we pretty much have a fixed amount we make and we have to learn to be save ever penny for when we are laid off. the amount of time varies from year to year, but every year it does happen and for a extended period of time. so to have a cheap place to go back to is great and as long its not sunday most small towns have the town dinner and most of the things you need and as for the extra stuff you want, you have the internet for. also one more thing to look at is the right small town. some small towns do have golf courses. Just some food for thought from a person who has lived a much different lifestyle.

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  2. Joe W says:

    After my question was read out I was immediately outed as a non-American. Funnily enough, the suggestions of a gay-friendly area, local diner and (replacing) golf (with soccer) were bang on the money. The science of cold reading 😉

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  3. Michael Young says:

    The trouble with paying cash for things instead of credit is that cash purchases become untraceable unless you want to do a lot of bookkeeping on your own. All your credit/debit card purchase histories are immediately and automatically collected and made accessible to you. Cash shows up as a bank withdrawal, and then it’s gone from records. I’m far more willing to splurge with cash, because it FEELS like cash is already spent the moment you withdraw it, so keeping it in your pocket just feels wasteful.

    About preparing kids for spending decisions, one thing I regret from growing up is how sudden the ramp up of expenses was. You go from a $40 a month allowance, buying a movie or two, or a few books, and then you’re at college spending many hundreds a month on basic essentials, like rent, food, etc. I had help from my parents with rent, but I was trying to fit all other expenses to that same $40 a month budget I’d become accustomed to all through high school, which meant I bought food and nothing else. I can point to a year in my life where I just missed out on all popular culture because I wouldn’t buy movies/books/cable/phone service/etc. I also lost 60 pounds, though I’ve since managed to recover to being unhealthily overweight. 😉

    I’d suggest getting a kid more comfortable with having traditional expenses. Even while at home, give him a thousand a month, charge $700 as rent, and have him start covering all his day to day expenses. Encourage him to save half, to accumulate some savings for a big expense like a car. More important to teach budgeting than thrift.

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    • Steve Reda says:

      “The trouble with paying cash for things instead of credit is that cash purchases become untraceable unless you want to do a lot of bookkeeping on your own. ”

      This is exactly what I was referring to. I may have left out the all-important factor that I use financial software to track my incoming/outgoing spending. When I have cash it’s usually either repayment or withdrawn some time ago for a cash-only venue. I don’t have to watch any purchase I make count on the “outgoing” side of my cash-flow because my financial software already counted the withdrawal some time ago. Really cool to have my question read and answered! Maybe my assumption is only applicable for a very select group of people like me who use financial software and watch their finances very closely digitally.

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      • cd says:

        Hidden due to low comment rating. Click here to see.

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      • Jessica says:

        Steve: I definitely understood your question and feel the same way, and I’ve had conversations with friends of the same age (I’m 27, almost 28) who also say that they rarely carry cash and when they do it feels like free money. I was disappointed that Levitt dismissed the question out of hand and didn’t consider whether the existing studies miss a generational shift with the advent of technology.

        cd: I do save all my receipts, but that’s a far more cumbersome way to track my overall spending and by-category spending than, which automatically downloads my new transactions (made with credit or debit). If something falls into a different category than usual, I just change the category, which takes less time than manually entering a cash transaction (which I usually don’t remember to do).

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      • cd says:

        All I ever hear about is how it puts all the transactions in the wrong categories or marks rent payments as “abnormal” or other sorts of incompetence. Though for all I know my other friends all use it and are happy with it and never bring it up in conversation.

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      • K says:

        I think the example of $60 for a tank of gas was the wrong size for the credit vs cash discussion. Most of the time I carry no to little cash on me – and, like a lot of people my age, let’s assume – I don’t enjoy tracking a bunch of tiny transactions when I use Mint or some other product to track my spending. Some of that is shame that I caved and bought something small and some of that is fear of leaving myself open for identity theft for a discretionary purchase. It could also just be a desire to look at the online record of one’s spending for the month and see a small, easily remembered, number of purchases.

        Let’s say I see a cover article on Freakonomics at a magazine stand. Let’s also say the magazine is $4.00 and I’m not sure I’ll remember to look it up online later. If I have $5 cash in my pocket I’m far more likely to buy it than if I have to use my credit/debit card and risk another chance at identity theft, as well as have to remember it when I track my spending online later (and perhaps feel guilty I bought anything that day at all)… all for a magazine with an interesting article.

        It would be helpful if we knew what people of different age groups generally consider a good amount of cash to have on them on an average day and how much they’re concerned about the risk identity theft when dealing with small, unnecessary purchases.

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      • Prithvideep says:

        Hey Steve,

        One last point I want to make in your favour, that I don’t think has been mentioned on this thread of yet, is regarding the accumulation of payments.

        Everyone is right in saying that the frequent checking of accounts via smartphones/ apps etc reduce the time between the transaction and the “pain of paying”. Infact in countries like India, you receive a text message with the amount you’ve spent and the remaining balance/credit on your card as a security measure, the moment it is swiped making the delay in the pain of payment absolutely 0. This completely negates any “advantage” cards have over cash in terms of increasing your spending.

        However the point I want to make is that cash never has the component of CUMULATIVE expenses while all your bank/card transactions do. What that means is that in cash we only see that we have spent say $10. But on credit we see we that with this $10, our total spending for the month has gone up to $400!! The amount is so much more and thus the pain of paying is so much higher!

        Additionally, most people link their cards directly to their bank account and unless you are a savvy financier, you most likely have only one bank account that is used frequently. So while an empty wallet means you are out of money for the day (until you get home or wherever else you keep your money), an empty account means you are out of everything! No more ATM stops! Thus the fear/threat/ pain of paying is higher cause we know we are always nearing our limit! This is especially true of college kids and those just into the work force. A lot of times our spending is paycheck to paycheck and a 0 balance is the scariest thing there is! Cash cannot compete with that!

        Hopefully Dubner and Levitt read this and reconsider their comments.

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    • greg says:

      Agree, I also agree with the question poser. I have an app on my phone and regularly check my bank account but cash flies out of my wallet if it is in there in a way it doesn’t if I’m paying by card because I base my budgeting around my bank.

      If you pay with a debit card, not a credit card, and they are very different things and they don’t address it.

      As is buying online vs buying in person. I agonise over cost of stuff online in a way I rarely do in real life (mainly cause what I like to buy in real life are food, petrol and some basics) because I can see my bank balance while I’m buying stuff.

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  4. Steve says:

    I remember Steve Levitt talking about how much he loved his electronic toothbrush in an earlier post – I took his advice and tried one myself. True to his claim, it was really a superior brushing experience. The one downside: has anyone else noticed a spike in the cost of replacement toothbrush heads? It seems like they are exorbitantly expensive for what they are.

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    • Lizzie says:

      No joke- every time I buy replacement heads I get sticker shock. I haven’t tracked the prices using any scientific method, but it seems to me that either a) the cost per head is increasing over time, or b) more heads are being packaged together (I used to see them sold in packs of 3, but now I see packs of 5) to increase the transaction cost while the unit cost remains the same.
      This is probably the nerdiest thought I’ll have all day. Thanks Steve.

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      • Steve says:

        Nice – so I’m not the only one! Also, I’ve tried buying generic/off-brand replacement heads… which are very substandard (almost to the point of being a regular tooth brush). It seems like there’s money to be made if someone can produce a low cost, high quality replacement head.

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  5. MarkD says:

    I found Levitt a bit out of touch in this podcast. 20-somethings should be encouraged to spend? Has Levitt forgotten about all of the recent college grads who are working at starbucks as their college degrees gather dust? 3-5 years from now I would hesitate to hire someone who spent a very important developmental period coasting through life and instead prefer a spunky college grad from that year. The stale college grad would be grateful but in my experience that motivates for a couple months before old habits re-emerge. A fresh college grad who wants to impress can go gang-busters for years and turn into a cornerstone of a company.

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    • Steve Cebalt says:

      Certain experiences in youth are worth more because they create a memory or a knowledge base for the rest of a person’s life, increasing quality of life. Many expenditures in youth fall into this category and create more value than saving because the experience is leveraged over time. Also, youth is a “utility multiplier” that makes money worth more. A keg of beer at a frat party will create more fun than a keg of beer at a 50-year-old’s birthday party. More fun for the buck is powerful economics. Plus the money avoids the erosion of inflation, which compounds just like interest on savings would.

      BUT, I find myself disagreeing strongly with Mr. Levitt for the first time, specifically his assertion that a person will never be poorer than they are in college. I agree with MarkD about the Starbucks jobs. Plus, I had far more DISPOSAB LE income when I was young and “poor” than I do now at age 53, with 4 kids in college. The scale and the stakes are SO much higher as we grow older.

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      • Don says:

        I agree with both points you make. And I think they don’t have to be mutually exclusive.

        As a 50 year old, where most of your income goes to large scale payments (e.g. kids tuition), you don’t have much disposable income. However, that doesn’t mean the $100 a month you save as a twentysomething is coming in handy here because the scale is much different.

        Though, it really also depend on your position. If you are a junior in college with a mediocure degree, and no “real job” in sight, that extra money you save for a year or two in college may buy you some extra time to build human capitol the first year you get out of college.

        As far as paying for credit cards. I agree with the questioner and the question IS consistent with mental accounting. I have it setup where my budget is tracked by, and all my credit card spending is logged to tell me how much in each category I spent. So its not easy for me to swipe a card on any item without considering my budget. If I spend cash, no one knows, its essentially “free money” that is not assigned to any mental accounts. So in that sense, the effect of mental accounting and the effect of the “pain of paying” is kind of in conflict here.

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    • Lucy says:

      I also disagree with Levitt’s advice. One reason is that I think having a bit of extra cash when you graduate can make you a lot more flexible about what job you take up, and greatly increase your earnings/happiness potential. I didn’t save enough when I was a student – to be honest I found it hard enough to pay for my living expenses from my part-time jobs, so there wasn’t much I could cut down apart from food – but I did waste some money on take away food when I should have just been eating beans and rice, etc., and I could have spent less on alcohol!

      When I graduated, I had almost no money and took the first job I could get, settling for a lower salary than I’d hoped for. In contrast, I know people who waited until they got exactly what they wanted, enduring several months of unemployment, and eventually they got a higher paying job that meant their earnings quickly outpaced my own. I’ve found once you’ve started working, people base their perception of what you are worth on what you are already doing, so I think it’s hard to come back from this setback. It seems to me that a bit of extra liquidity early on can go a long way.

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    • si says:

      I find it a bit oversimplistic in that it seems to be based on a somewhat rosy pre-recession model where young people can find decent employment fairly easily and then have a certain amount of present and future job (and location) security once they do.

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  6. MJ Person says:

    I’m with the questioner on this one. These days, money in my pocket is spare, extra money easily spent. Money on credit cards, bank accounts, bills etc. are different. They all show up on the computer screen, in the budget, they are literally part of my “SCORE”. Putting something on my credit card has real effects that reduce my score. Buying something with cash just reduces the paper in my pocket. Essentially meaningless compared to more serious things like bank balances and available credit balances.

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    • Paris says:

      Couldn’t agree more. In fact, it’s common for friends of mine in their mid-20s to avoid withdrawing cash because they are afraid of spending it too quickly

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  7. Scott says:

    Mr. Levitt seems a little disingenuous here. He says he doesn’t care about money and things but the things he loves are big houses, big yards, golf and good schools for his kids. Sounds like the quintessential yuppie to me or do these things not cost money. Add to that his proud disdain for culture and he sounds just like the other so called experts on things economic, the bankers.

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  8. E.O'B says:

    I think you missed an important component of the question about whether the younger generation, who grew up more accustomed to using plastic, spends cash more freely than credit cards. That is that many of us make most of our purchases, even small ones, with plastic – but it’s not actually credit. I use my debit card for most things, and the money comes straight out of my bank account. It’s not credit. And I do tend to think of cash differently, because it’s money that is already out of my account.
    That is not to say that we don’t treat a credit card differently than a debit card. But it may be worth pointing out that we are more likely to have begun using “plastic” in the form of debit cards, and are more likely to have set up our credit card bills to automatically debit our bank accounts for the full balance every month anyway. So while we certainly have the same attitudes about spending credit vs. “real money” as older generations and presumably everyone else, it may not manifest in the same way. Basically, we see spending on a debit card as mentally ticking down the numbers in a bank account, and spending on a credit card as nearly the same thing, while spending cash doesn’t do that and sort of feels more like spending free money, or money that doesn’t count.

    Two more quick points about that: The first is that I studied in Germany for two years, and most stores don’t accept credit or debit cards. Mostly you have to use cash for everything, so you have to carry around cash and keep track of how much you have so you don’t run out. Plus, at the time I was a starving student and always broke. So spending cash felt much more like spending real money, and I paid much more attention to it. When I finished and came home, I reverted to my previous attitude about cash vs. my debit or credit card.

    The second point is that I can recall a few times when I or someone else of my generation (I am 31, BTW) paid for coffee or some other small purchase with some form of plastic, and I overheard some older individual in line grumbling about how these young people just run up their credit cards and buy their lattes with borrowed money. A couple of times I have even tried to explain the use of a debit card to someone like that, and they really do not understand that this is not the same thing as spending money you don’t have because you have a credit card – it is just saving a trip to the ATM.

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    • James says:

      You’re also missing a couple of points about paying with plastic. First, rewards cards. I get anywhere from 1-5% cash back on whatever I pay for with plastic. Second, the float. Even in normal times, I have an average of about 3 weeks between purchase and payment due date, in which the money is in MY accounts, earning money for me. These days, with zero-interest for X months cards? I just transferred (no-fee transfer) most of the balance of the last 0% card to one with %0 to the end of 2014. Meanwhile, the money’s sitting in my mutual fund accounts, which have gone up about 20% in the last year or so.

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      • Steve says:

        Random thought – when was the last time someone payed for something with a credit card and they actually took a carbon copy swipe of the card. For me I think the last time was in 2006; it seemed a little weird at the time though. My understanding is that these swipes were the norm at one time (maybe until the early 90’s when stores became networked to some main credit database?).

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