There is a line in the 1999 Oscar-winning film American Beauty when the main character Lester (played by Kevin Spacey) starts to rebel against his cookie-cutter life. In a voice-over, he mocks his wife Carolyn’s materialism. Carolyn works in her manicured rose garden. She is put together in a matching outfit. Lester remarks, ‘That’s my wife, Carolyn. See the way the handle on the pruning sheers matches her gardening clogs? That’s not an accident.’
This materialistic image of what life should be started to be embodied everywhere – films, radio, magazines, political speeches, advertising – and all was wrapped up in the famous idea of the American dream. The concept of the American dream, and the image of the perfect suburban home that went with it, became such an inherent part of the fabric of American culture and even a global advertisement to the rest of the world on the way to live that it became un-American to challenge it. Douglas Rushkoff comments in Life Inc., ‘It was less important for this life to provide actual satisfaction as for it to produce a class of people who behaved as if they were satisfied.’12 This desire created a relentless pressure to buy more stuff. Now the barrier that companies needed to overcome was giving people an easy way to pay for it.
Buy Now, Pay Later
Richard Feinberg, a consumer psychology professor at Purdue University and a pioneer in consumer behavioural economics, has long studied the influence of credit cards on our spending decisions. One of the first experiments he conducted, with the help of a local restaurant, involved recording the size of the bill, the size of the tip, and the method of payment – cash or credit card – for 135 customers. He found that people who paid by credit card left tips 2 percent higher than those who paid by cash.
To make sure this was not simply a case of credit card customers being wealthier than cash customers (or company expense-account diners), Feinberg followed up with a controlled experiment in a laboratory. He randomly assigned one group of undergraduate students to a lab with MasterCard signs and logos intentionally placed in the corner. He told the subjects this paraphernalia was for another experiment and to pay no attention to it. A second control group had no credit card-related materials. He showed both sets of participants identical pictures of various products, such as a dress, a tent and a typewriter. For each item he asked, ‘How much would you be willing to pay for it?’ Remarkably, Feinberg’s participants exposed to the red and yellow logo (even though they were told to ignore it) were willing to pay up to three times more for products relative to the control group. The study showed that mere image exposure to a credit card logo is sufficient to affect what people will pay. Feinberg also discovered that students answered the questions faster in the ‘MasterCard’ group room, an indicator that people think less or at least for shorter moments when they spend with plastic.13
Feinberg’s experiments, as revealing as they were, didn’t involve people making decisions about actual purchases. To follow up, MIT economists Drazen Prelec and Duncan Simester conducted a study in 2001 based on real bids for real commodities (the study was later appropriately named Always Leave Home Without It).14 MBA students from MIT participated in two real auctions, one for a pair of tickets to a Boston Celtics game, and the other for tickets to a Boston Red Sox game. The Celtics tickets were not just any tickets, mind you; they were for the last regular-season game with the Miami Heat, a game the Celtics had to win to clinch the division title. Tickets had been sold out well in advance and could be bought only from touts. The Red Sox tickets were for a regular-season baseball game with the Toronto Blue Jays.15
The students who volunteered for the experiment reported to a classroom at lunchtime and were handed a sheet of paper that described the prizes and gave instructions on how to record their bids. No information on market values for any of the prizes was given, but descriptions read like this: ‘One pair of 3rd row balcony tickets for Celtics-Miami game, Sunday April 19’. The students were told not to discuss their answers or anything else about the bid sheet. Unbeknownst to the participants, two different versions were handed out at random. Half the sheets stated that payment was required by winners in cash, the ‘cash condition’ sheet. It included a note that they had to indicate whether they had ‘ready access to a local cash machine’. The other sheet stipulated that payment must be with a credit card.
The results were clear. Students who agreed to pay with cash bid an average of $28.51 for the Celtics ticket, but the students who agreed to pay with plastic bid an average of $60.24 – an incredible 113 percent premium over the cash bids. The outcome for the Red Sox tickets showed the same pattern, but the price premium for credit card bids over cash was lower, at 76 percent, perhaps because these seats were not as desired or rare. Were the students who bid with credit cards less able to constrain their desire and more reckless with their bidding? And given that the bids were for items of an uncertain value, how much does this experiment apply to the world of goods with a price tag?
Dilip Soman, a marketing professor at the Hong Kong University of Science and Technology, designed a study to look at this very point. Soman intercepted forty-one students after they had made purchases at the campus bookstore and asked them to recall the exact amount they had spent. Of the respondents who had paid by credit card, only 35 percent could recall the amount; the remainder either named a figure far lower than the true amount or confessed that they had no idea.16
These experiments appear to demonstrate how credit cards – or even just credit card symbols – alter our perception of the value of a product. But they illustrate deeper clues into what is going on in our brains when we buy. When cash tangibly leaves our hands, we are more conscious that we are spending money than when we use a card.17 What economists such as Feinberg, Prelec and Simester have shown is that credit cards, in contrast, make the transaction less ‘real’, detaching the act of purchase from payment. The behavioural experts call this phenomenon ‘decoupling’. Perhaps it is this decoupling that explains why credit cards have become the ultimate enablers or, more accurately, tranquillizers of shopping.18 Indeed brain imaging experiments indicate that the insular cortex, the region of the brain often associated with addictions and negative feelings, experiences less activity when people pay with credit cards over cash. George Loewenstein, a neuroeconomist at Carnegie Mellon, points out that ‘the nature of credit cards ensures that your brain is anaesthetized against the pain of payment.’19
It’s hard to imagine life before credit cards. In stark contrast to the shopping behaviour this plastic device has come to facilitate, the basic idea for the credit card was invented by an individual, not a corporation, and for a practical reason. In 1949, in Major’s Cabin Grill, New York City, Frank McNamara, head of Hamilton Credit Corporation, took his partners to dinner. Their conversation centred on the problems of a customer who had borrowed some money from Hamilton Credit, but was now unable to pay it back. When the bill arrived, it was Frank’s turn to pay, but he realized to his embarrassment that he’d left his wallet in another suit pocket at home. He called his wife and asked her to drive over and bring him money, vowing to himself that he would never let this mistake happen again. At this moment he thought about the troubled Hamilton customer who could not pay his debts and his own personal embarrassment. ‘What if there was some way to pay the bill without cash in hand?’ Frank mused. Thus inspired, Frank developed the first dual-party credit card, Diners Club, and the credit card was born. In the credit card industry, this dinner is often referred to as the ‘First Supper’.
In just one year, twenty thousand people became card holders. Five years later, that number had increased tenfold. Other banks took note of the popularity of this new payment device, but the idea didn’t gain mass appeal until 1957. That was the year when the nation became obsessed with the story of Mr Harold Bortzfield and his wife from Lancaster, Pennsylvania, who set off on an around-the-world thirty-day trip with nothing more than an airplane ticket and a Diners Club card. Shortly thereafter American Express introduced the first ‘general-purpose’ ‘Don’t Leave Home Without It’ credit card made of plastic, and then along