“What drives people to accept unfavorable exchange rates when converting foreign currencies?”

This study researches individual currency conversion behavior in an ATM cash withdrawal context. The purpose of this paper is to explain the seemingly irrational behavior that people display when confronted with Dynamic Currency Conversion (DCC), a service to pay for foreign prices in your own currency. Existing literature finds that reference prices and imposed markups upon exchange rates have no impact on the usage of DCC. By using behavioral economic theory this study attempts to give more insights in the driving factors of currency conversion behavior. A total of 423 respondents filled out an online survey, where an ATM withdrawal was simulated. The respondents were randomly divided over different treatment groups, testing for markup, nudging and effects of behavioral attitudes. The main findings are that the level of ambiguity aversion is positively related to DCC usage when there is a nudge, relative to when there is no nudge. Second, a markup of 20% significantly reduces DCC usage relative to 0% markup. Thirdly, there is weak evidence of a negative effect of a nudge upon DCC usage. Lastly, nudging seems to influence the decision process that people go through during DCC withdrawals. Attitudes towards risk, ambiguity and time are not related to DCC usage. Policy makers can use these outcomes to regulate the use of DCC, authorities or banks can use these insights to inform or advice people and DCC providers can use these insights to optimize their business models.