What is Financial Abstraction?

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 the Paranormal activities (..will definitely work on writing on them though), this video is about Adam Caroll 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, after watching the entire video, I decided to know more about the term "Financial Abstraction", and how it could affect us.

What does Financial Abstraction mean?

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 shapes 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, PayPal, or send money to a friend through an online transfer, the loss of money is much easier to the 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?

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 the cash is abstract.

Purchase behavior and Financial abstraction
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.

My conclusion:

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.

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.