Financial Abstraction: Impact On Consumer Behavior

YouTube is a funny place, you start by watching awesome videos then suddenly you fall into the recommendation trap, and you end up watching "Top 5 Paranormal activities' by the end of the day.

Well, this article does not speak about Paranormal activities (…will definitely work on writing on them though), this video is about Adam Carroll speaking about "When money isn’t real: the $10,000 experiment".

Interesting how our relationship with money changes due to its physical form... I got curious, and after watching the entire video, I decided to know more about the term "Financial Abstraction", and how it could affect us.

What Is Financial Abstraction?

Financial abstraction refers to the process of separating the underlying value of a financial instrument or asset from the physical form that it takes. This allows investors to trade and invest in the value of the asset without having to hold the asset itself.

One way that financial abstraction can impact consumer behavior is by making it easier for individuals to invest in a wider range of assets. For example, through financial abstraction, an investor can purchase a share in a company without having to physically own the stock certificate. This can make it more convenient for consumers to diversify their investment portfolio and potentially mitigate risk.

The concept of financial abstraction is based on behavioral economics, which deals with how psychology can impact economic concepts. It means that our perception and understanding of how financial transactions and activities shape how we decide to spend our money. To give you a better understanding:

Today's currency is going online, with money becoming more of an idea than a physical reality due to the rise in online transactions, and the theory that our relationship with money changes depending on whether it's real or not, is a concept known as financial abstraction.

Simple definition!, but financial abstraction can have a psychological effect (on spending habits ...among other things).

However, financial abstraction may have psychological effects on how people make purchases, for instance: people who constantly use electronic payment services due to ease and convenience may have a distorting view regarding the value of money if they are asked to pay cash for the same transaction.

In other words, when you spend money using your credit card, debit card, or PayPal or send money to a friend through an online transfer, the loss of money is much easier to stomach and get over psychologically, than if the same transaction were to be made in cash.

For some reason, certain individuals do not think of this as real money, which is very alarming for their spending habits.

This concept can easily explain why online spending has increased in the last ten years, as our psychological interpretation of the concept of money affects our purchases.

Does it affect Consumer Purchase patterns?

Financial abstraction can also make it easier for consumers to engage in speculative or risky investment activities. Because financial abstraction separates the value of an asset from its physical form, it can be easier for consumers to trade and invest in assets that may be more volatile or difficult to value. This can lead some consumers to make decisions that may not be well-informed or that may expose them to significant financial risk.

If you are playing a game like Monopoly with your friends and family, you are more likely to be more liberal with the "cash" reserves you have while playing it. This is mainly because your perception of cash is abstract.

Financial abstraction has an effect on purchase pattern

With the rise in the number of online marketing giants for shopping, we can see that if the offers and discounts are on point, we are more likely to spend our cash on purchasing the next best fashion choice.

When you have cash, you are more aware of the expenditures you make. In the age of online payment software and methods, it's the perception and control you have over the spending habits that help you spend economically. If you wish to understand the effects of this concept on your own purchase pattern, you could track how much you spend if you are given $1000 to spend.

Does Financial Abstraction Affect Consumer Behavior?

Well, my conclusion is the impact of this theory on people’s spending habits, and this discussion is usually aimed at millennials like me as we are more likely to spend money in a way that's more comfortable and convenient.

For example, using online transfers to make purchases, or buying clothes from online websites.

Financial abstraction creates a negative spending habit and can lead to more impulse purchases.

Overall, financial abstraction can have both positive and negative impacts on consumer behavior, depending on how it is used and the level of understanding that consumers have about the assets in which they are investing.

So, next time you decide to purchase something...try spending cash than online. Has your behavior changed depending on the situation? If yes, that's the theory of financial abstraction.