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:
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
– ½ Snickers bar for 1 Hershey’s kiss
Most kids took this
• Group 2
– 1 Snickers bar for 1 Hershey’s kiss, or
– ½ Snickers bar for free 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=LmJzQ3cV
t88
• 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
• Barnes and Noble sells a member card with a
$50 annual fee that entitles the member to
10% discount
• I don’t buy it even though I would save more
than $50 annually from the discount
• The card would be more popular, I think, if it
was free, even if the discount was 3%
• Is Barnes and Noble being stupid?
Free! drives us crazy
• Yes, B&N is indeed being stupid in the sense
that we have been discussing
• But we will later see that B&N may be relying
on other psychological quirks in us
– We may buy the card thinking we’ll use it a lot
(and, therefore, save a lot of money from the
card’s discount) and then not use it much
– Or we may buy more books than we normally
would; having paid for the card, we’d want to use
it
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.