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I was watching a TED Talk delivered by Dan Ariely where he discussed whether or not we were in control of our own actions. After watching this, I read his book, Predictably Irrational, which went through the ideas in the TED Talk in more detail. One of the concepts that I found interesting was this idea that "Free" isn't necessarily free. There were two chapters in the book that discussed this. The first was about how everything is relative, even when it shouldn't be - this is an indirect example of the cost of "Free"; the second was about the cost of zero cost - this is a more direct example of the cost of "Free".


Apparently everything is relative. By everything, I mean everything that we humans have to make decisions based on. To use the example in the book, the author (Dan) came across an ad for subscriptions to The Economist with the following options:

  1. Online Subscription: $59.00
  2. Print Subscription: $125.00
  3. Online + Print Subscription: $125.00
This got him curious as to why they would offer such a scheme; surely it must have been a mistake. However he suspected that it was more likely to be an example of clever marketing. So he decided to do an experiment. He offered the above three options to 100 students from MIT's Sloan School of Management. 16 students picked Option 1, 84 students picked Option 3, and 0 students picked Option 2 - as one would expect. He then retried this experiment, but he removed Option 2 as a choice the students could make. This time around 68 students picked Option 1 and only 32 picked Option 3.

Why such a difference? It is because humans are not good at placing absolute values on things. We need a frame of reference upon which we make comparisons. Because Option 3 seems to give an Online Subscription for free, we are more inclined to pick that over paying for an Online Subscription only. However, the main reason for choosing Option 3 has more to do with the relative pricing than the implicit "Free".


Zero cost as it turns out is not zero. To study the power of "Free", Dan along with Kristina Shampanier (MIT PhD Student) and Nina Mazar (UofT Professor) performed an experiment. They set up a chocolate shop where they offered the higher quality Lindt truffles and the lower quality Hershey's Kisses. The truffle was priced at 15 cents while the Kiss was priced at 1 cent. When customers came to buy the chocolate, 73% chose the truffle while 27% chose the Kiss. They then repeated the experiment, except they lowered the price of each by 1 cent; the truffle was now 14 cents and the Kiss was free - by an ordinary analysis of the situation using the theory of economics (ie Cost/Benefit analysis), one would come to the conclusion that nothing should change. However, what they found was that 69% now chose the free Kiss while 31% chose the truffle.

Several experiments were performed where different prices were chosen; every time the price went to zero, the majority would chose the free product. The reason "Free" is so enticing is because it is tied to the fear of loss humans have. When we choose something that is free we believe there is no possibility of loss; after all it was free. However if we choose the item that isn't free, then we run the risk of having made a bad decision. This can, ironically enough, result in us making bad decisions. For example, Phone A and Phone B do similar things. Phone A is a higher quality product (and hence more expensive). Now, depending on your situation, you may not need the highest quality phone; Phone B may be perfectly sufficient. However, Phone A comes with a free 64 GiB external micro SD card + some other perks. What was once an easy decision becomes less so, and a non-zero number of people who do not need Phone A will buy it.


We humans are hilariously irrational, even though we try to be as rational as we can. "Free" is one of the biggest pitfalls we encounter on a daily basis, and is something that needs to be examined with some emotional insulation; getting too excited about something just because it is free is probably going to lead to some bad decisions.

And regarding Dan Ariely, I strong recommend watching the TED Talk and/or reading his book; they are very well presented and very engaging.



Sources:
http://www.ted.com/talks/dan_ariely_asks_are_we_in_control_of_our_own_decisions
Preditably Irrational The Hidden Forces That Shape Our Decisions, Dan Ariely

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