Batching Mental Transaction Costs
There’s a popular American pastime that involves flinging dollar bills at scantily clad dancers. Canada, Europe, and the UK lack small-denomination banknotes, so strip club patrons have limited ability to express appreciation for their performers. Customers can either pelt the dancers with coins, which is rude; or shower them with large bills, which is extravagant. The transaction costs are unnecessarily high, and onstage tipping is rare.
In Australia, the smallest banknote is a five. While living in Sydney, I discovered (not from personal experience, really) that gentlemen’s clubs sell fake banknotes for guests to use as tips. The dancers exchange the fake dollars for real money at the end of the night.
Fake dollars for sale at a gentlemen’s club in Sydney. Why did they model their money after USD instead of Aussie banknotes? Also, I bet the US $2 bill would have seen much wider adoption if the note had featured a pole dancer instead of Thomas Jefferson. He already has the nickel! How bout some diversity, come on.How terribly exploitative! Instead of peer-to-peer payments, the house intermediates every transaction with self-issued fiat. It probably even takes a cut.
But… maybe it’s not so bad. I endured many a childhood birthday party at Chuck E. Cheese, where parents would hand each kid a stack of tokens and set them loose. Tokens could be used to pay for rides and games and candy, and were functionally equivalent to a quarter.
We already have quarters. Why did Chuck E. Cheese go through the hassle of minting its own coinage when it could have simply installed a laundromat change machine?
...MORE (the sting is in the tail)Chuck E. Cheese tokens come in a jumbo plastic cup, just like a real casino.
Chuck E. Cheese and Aussie strip clubs employ the same brilliant strategy of batching mental transactions. Every monetary exchange incurs a cognitive cost, if from nothing more than the conscious decision to spend money. The overhead is nominal for most standard transactions, but relatively massive compared to a micropayment.
By forcing customers to make a large upfront commitment, these establishments avoid imposing a cognitive load on every subsequent exchange.
Casinos employ the same strategy with poker chips and slot tokens:
Gamblers wager more freely with play money they’ve already bought. Sure they can cash out, but that’s an additional transaction cost...
