The denomination effect is a form of cognitive bias relating to currency, suggesting people may be less likely to spend larger currency denominations than their equivalent value in smaller denominations. Researchers Priya Raghubir and Joydeep Srivastava found in their studies that consumers tend to spend more readily when dealing with smaller denominations, perceiving them as more exchangeable and easier to part with compared to larger bills.
In a study involving students, nearly 63% of participants who received four quarters opted to buy candy, while only 26% of those given a $1 bill made a purchase, illustrating the denomination effect in action.
To overcome the denomination effect, individuals can consciously treat larger denominations as interchangeable with smaller ones and remind themselves of the equal value to encourage spending when appropriate.