The Power of Free: Understanding Behavioral Economics
The Inexplicable Appeal of “Free!”
Non-standard decision making
Behavioral Economics
Udayan Roy
Reading
•
Predictably Irrational
–
Chapter 3 The Cost of Zero Cost
It’s Free!!!
•
We seem to lose all sense when told that something or other is
free
•
Our ability to make intelligent trade-offs deteriorates when the
price drops to zero
•
We tend to choose a “free” option even when it is clearly
inferior to other options
Chocolate Experiment
•
Students were offered the opportunity to buy one chocolate
per person at reduced prices
•
Here are the results:
Another chocolate experiment
•
Each child is given 3 Hershey’s Kisses and then offered a
trading opportunity
•
Group 1
–
1 Snickers bar for 2 Hershey’s kisses, or
–
½ Snickers bar for 1 Hershey’s kiss
•
Group 2
–
1 Snickers bar for 1 Hershey’s kiss, or
–
½ Snickers bar for free
Most kids took this
Most kids took this
In both cases, one could get an additional Snickers bar by giving up one Hershey’s kiss. This
trade off is popular for Group 1, but not when a “free” option is available.
Amazon.com gift cards experiment
•
One gift card per person
•
Offer 1: $20 gift card at a price of $7
•
Offer 2: $10 gift card for free
•
Guess which one was the overwhelming favorite!
Amazon.com in France
•
For some reason, amazon.com in France was not showing sales
levels that were achieved in all other countries
•
It turned out that all other countries had free shipping while
there was a
one Franc
(about 20 cents) shipping fee in France
•
When shipping became truly free in France, sales quickly
jumped up to the levels in other countries
Free!
drives us crazy
•
Clearly our ability to make rational trade-offs is completely
gone when something reaches the magical price of “free!”
Video
•
Free!
by Dan Ariely:
http://www.youtube.com/watch?v=LmJzQ3cVt88
•
When Free is Dangerous
by Dan Ariely:
http://youtu.be/TlXjdW0xQco
•
Free and Irrationality
by Dan Ariely:
http://youtu.be/MDQf6x8tcXA
Free!
drives us crazy
•
We may opt for a free bank account and spend $6.00 per
month on online banking instead of a bank account with a
$5.00 monthly fee that provides free online banking
•
We may pay $10,000 more for a car that comes with free oil
changes even though the cost of oil changes over the car’s
lifetime may be less than $6,000
Free!
drives us crazy
•
We may go to the zoo on a day admission is free even though
we’d be much happier going on another day when admission is
$15
Free!
drives us crazy
•
As a policy maker, if you wish people to do
X
(whatever
X
is),
don’t just
reduce
the price or fee people must pay to do
X
,
make it
free
!
–
X
could be taking the flu shot, buying nicotine patches (if you are a
smoker), taking online courses, etc.
This presentation leaves out a point made by Ariely: when something is free, social norms replace market norms. The Israeli daycare case makes the point. I should re-include this aspect of thins being “free.” What does the subject matter of this presentation have to do with economics? How can people protect themselves from the weaknesses discussed here? How can or should rational actors and policy makers make use of the ideas discussed here?
Delve into the inexplicable allure of "free" and its impact on decision-making through intriguing experiments and real-world examples. Discover how the concept of zero cost can influence our choices and override rational decision-making processes, shedding light on the fascinating realm of behavioral economics.
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Presentation Transcript
The Inexplicable Appeal of Free! Non-standard decision making Behavioral Economics Udayan Roy
Reading Predictably Irrational Chapter 3 The Cost of Zero Cost
Its Free!!! We seem to lose all sense when told that something or other is free Our ability to make intelligent trade-offs deteriorates when the price drops to zero We tend to choose a free option even when it is clearly inferior to other options
Chocolate Experiment Students were offered the opportunity to buy one chocolate per person at reduced prices Here are the results: Situation A Situation B Price $ Quantity % Price $ Quantity % Lindt truffles 0.15 73 0.14 31 Hersheys kisses 0.01 27 0.00 69
Another chocolate experiment Each child is given 3 Hershey s Kisses and then offered a trading opportunity Group 1 1 Snickers bar for 2 Hershey s kisses, or Snickers bar for 1 Hershey s kiss Group 2 1 Snickers bar for 1 Hershey s kiss, or Snickers bar for free Most kids took this Most kids took this In both cases, one could get an additional Snickers bar by giving up one Hershey s kiss. This trade off is popular for Group 1, but not when a free option is available.
Amazon.com gift cards experiment One gift card per person Offer 1: $20 gift card at a price of $7 Offer 2: $10 gift card for free Guess which one was the overwhelming favorite!
Amazon.com in France For some reason, amazon.com in France was not showing sales levels that were achieved in all other countries It turned out that all other countries had free shipping while there was a one Franc (about 20 cents) shipping fee in France When shipping became truly free in France, sales quickly jumped up to the levels in other countries
Free! drives us crazy Clearly our ability to make rational trade-offs is completely gone when something reaches the magical price of free!
Video Free! by Dan Ariely: http://www.youtube.com/watch?v=LmJzQ3cVt88 When Free is Dangerous by Dan Ariely: http://youtu.be/TlXjdW0xQco Free and Irrationality by Dan Ariely: http://youtu.be/MDQf6x8tcXA
Free! drives us crazy We may opt for a free bank account and spend $6.00 per month on online banking instead of a bank account with a $5.00 monthly fee that provides free online banking We may pay $10,000 more for a car that comes with free oil changes even though the cost of oil changes over the car s lifetime may be less than $6,000
Free! drives us crazy We may go to the zoo on a day admission is free even though we d be much happier going on another day when admission is $15
Free! drives us crazy As a policy maker, if you wish people to do X (whatever X is), don t just reduce the price or fee people must pay to do X, make it free! X could be taking the flu shot, buying nicotine patches (if you are a smoker), taking online courses, etc.
