Predictably Irrational (8 page)

In this case I gave Zoe her treat—three Hershey's Kisses. But I did have a trick up my sleeve. I offered little Zoe a deal: a choice between getting a large Snickers bar in exchange for one of her Hershey's Kisses, or getting the small Snickers bar for
FREE
! without giving up any Hershey's Kisses.

Now, a bit of rational calculation (which in Joey's case was amply demonstrated) would show that the best deal is to forgo the free small Snickers bar, pay the cost of one additional Hershey's Kiss, and go for the large Snickers bar. On an ounce-for-ounce comparison, it was far better to give up one additional Hershey's Kiss and get the larger Snickers bar (two ounces) instead of a smaller Snickers bar (one ounce). This logic was perfectly clear to Joe and the kids who encountered the condition in which both Snickers bars had a cost. But what would Zoe do? Would her clever kid's mind make that rational choice—or would the fact that the small Snickers bar was
FREE
! blind her to the rationally correct answer?

As you might have guessed by now, Zoe, and the other kids to whom I offered the same deal, was completely blinded by
FREE
! About 70 percent of them gave up the better deal, and took the worse deal just because it was
FREE
!

Just in case you think Kristina, Nina, and I make a habit of picking on kids, I'll mention that we repeated the experiment with bigger kids, in fact students at the MIT student center. The results replicated the pattern we saw on Halloween. Indeed, the draw of zero cost is not limited to monetary transactions. Whether it's products or money, we just can't resist the gravitational pull of
FREE
!

S
O DO YOU
think you have a handle on
FREE
!?

OK. Here's a quiz. Suppose I offered you a choice between a free $10 Amazon gift certificate and a $20 gift certificate for seven dollars. Think quickly. Which would you take?

If you jumped for the
FREE
! certificate, you would have been like most of the people we tested at one of the malls in Boston. But look again: a $20 gift certificate for seven dollars delivers a $13 profit. That's clearly better than getting a $10 certificate free (earning $10). Can you see the irrational behavior in action?
*

L
ET ME TELL
you a story that describes the real influence of
FREE
! on our behavior. A few years ago, Amazon.com started offering free shipping of orders over a certain amount. Someone who purchased a single book for $16.95 might pay an additional $3.95 for shipping, for instance. But if the customer bought another book, for a total of $31.90, they would get their shipping
FREE
!

Some of the purchasers probably didn't want the second book (and I am talking here from personal experience) but the
FREE
! shipping was so tempting that to get it, they were willing to pay the cost of the extra book. The people at Amazon were very happy with this offer, but they noticed that in one place—France—there was no increase in sales. Is the French consumer more rational than the rest of us? Unlikely. Rather, it turned out, the French customers were reacting to a different deal.

Here's what happened. Instead of offering
FREE
! shipping on orders over a certain amount, the French division priced the shipping for those orders at one franc. Just one franc—about 20 cents. This doesn't seem very different from
FREE
! but it was. In fact, when Amazon changed the promotion in France to include free shipping, France joined all the other countries in a dramatic sales increase. In other words, whereas shipping for one franc—a real bargain—was virtually ignored by the French,
FREE
! shipping caused an enthusiastic response.

America Online (AOL) had a similar experience several years ago when it switched from pay-per-hour service to a monthly payment schedule (in which you could log in as many hours as you wanted for a fixed $19.95 per month). In preparation for the new price structure, AOL geared up for what it estimated would be a small increase in demand. What did it get? An overnight increase from 140,000 to 236,000 customers logging into the system, and a doubling of the average time online. That may seem good—but it wasn't good. AOL's customers encountered busy phone lines, and soon AOL was forced to lease services from other online providers (who were only too happy to sell bandwidth to AOL—at the premium of snow shovels in a snowstorm). What Bob Pittman (the president of AOL at the time) didn't realize was that consumers would respond to the allure of
FREE
! like starving people at a buffet.

W
HEN CHOOSING BETWEEN
two products, then, we often overreact to the free one. We might opt for a
FREE
! checking account (with no benefits attached) rather than one that costs five dollars a month. But if the five-dollar checking account includes free traveler's checks, online billing, etc., and the
FREE
! one doesn't, we may end up spending more for this package of services with the
FREE
! account than with the five-dollar account. Similarly, we might choose a mortgage with no closing costs, but with interest rates and fees that are off the wall; and we might get a product we don't really want simply because it comes with a free gift.

My most recent personal encounter with this involved a car. When I was looking for a new car a few years ago, I knew that I really should buy a minivan. In fact, I had read up on Honda minivans and knew all about them. But then an Audi caught my eye, at first through an appealing offer—
FREE
! oil changes for the next three years. How could I resist?

To be perfectly honest, the Audi was sporty and red, and I was still resisting the idea of being a mature and responsible father to two young kids. It wasn't as if the free oil change completely swayed me, but its influence on me was, from a rational perspective, unjustifiably large. Just because it was
FREE
! it served as an additional allure that I could cling to.

So I bought the Audi—and the
FREE
! oil. (A few months later, while I was driving on a highway, the transmission broke—but that is a different story.) Of course, with a cooler head I might have made a more rational calculation. I drive about 7,000 miles a year; the oil needs to be changed every 10,000 miles; and the cost per change is about $75. Over three years, then, I would save about $150, or about 0.5 percent of the purchase price of the car—not a good reason to base my decision on. It gets worse, though: now I have an Audi that is packed to the ceiling with action figures, a stroller, a bike, and other kids' paraphernalia. Oh, for a minivan.

T
HE CONCEPT OF
zero also applies to time. Time spent on one activity, after all, is time taken away from another. So if we spend 45 minutes in a line waiting for our turn to get a
FREE
! taste of ice cream, or if we spend half an hour filling out a long form for a tiny rebate, there is something else that we are not doing with our time.

My favorite personal example is free-entrance day at a museum. Despite the fact that most museums are not very expensive, I find it much more appealing to satisfy my desire for art when the price is zero. Of course I am not alone in this desire. So on these days I usually find that the museum is overcrowded, the line is long, it is hard to see anything, and fighting the crowds around the museum and in the cafeteria is unpleasant. Do I realize that it is a mistake to go to a museum when it is free? You bet I do—but I go nevertheless.

Z
ERO MAY ALSO
affect food purchases. Food manufacturers have to convey all kinds of information on the side of the box. They have to tell us about the calories, fat content, fiber, etc. Is it possible that the same attraction we have to zero price could also apply to zero calories, zero trans fats, zero carbs, etc.? If the same general rules apply, Pepsi will sell more cans if the label says “zero calories” than if it says “one calorie.”

Suppose you are at a bar, enjoying a conversation with some friends. With one brand you get a calorie-free beer, and with another you get a three-calorie beer. Which brand will make you feel that you are drinking a really light beer? Even though the difference between the two beers is negligible, the zero-calorie beer will increase the feeling that you're doing the right thing, healthwise. You might even feel so good that you go ahead and order a plate of fries.

S
O YOU CAN
maintain the status quo with a 20-cent fee (as in the case of Amazon's shipping in France), or you can start a stampede by offering something
FREE
! Think how powerful that idea is! Zero is not just another discount. Zero is a different place. The difference between two cents and one cent is small. But the difference between one cent and zero is huge!

If you are in business, and understand that, you can do some marvelous things. Want to draw a crowd? Make something
FREE
! Want to sell more products? Make part of the purchase
FREE
!

Similarly, we can use
FREE
! to drive social policy. Want people to drive electric cars? Don't just lower the registration and inspection fees—eliminate them, so that you have created
FREE
! In the same way, if health is your concern, focus on early detection as a way to eliminate the progression of severe illnesses. Want people to do the right thing—in terms of getting regular colonoscopies, mammograms, cholesterol checks, diabetes checks, and such? Don't just decrease the cost (by decreasing the co-pay). Make these critical procedures
FREE
!

I don't think most policy strategists realize that
FREE
! is an ace in their hand, let alone know how to play it. It's certainly counterintuitive, in these times of budget cutbacks, to make something
FREE
! But when we stop to think about it,
FREE
! can have a great deal of power, and it makes a lot of sense.

Reflections on the Price of
FREE
!

We learned from our experiments that we all get a bit too excited when something is free! and that consequently, we can make decisions that are not in our best interest.

For example, imagine that you were choosing between two credit cards: one that offers you a 12 percent APR but has no yearly fee (free!), and one that offers you a lower interest rate of 9 percent APR but charges you a $100 annual fee. Which one would you take? Most people would overemphasize the yearly fee and in pursuit of the free! offer would end up getting the card that costs them much more in the long run—when they inevitably miss a payment or carry a balance.
*

Although identifying and fighting the allure of free! is important in order to avoid traps while we are making decisions, there are also some cases in which we can use free! to our advantage. Take, for example, the common experience of going to a restaurant with friends. When the server drops off the check at the end of a meal, people often scramble to figure out the norms for payment. Do we each pay for what we ordered? Do we split the bill evenly, even if John had that extra glass of wine and the crème brûlée? free! can help us solve this problem, and in the process help us get more joy from dining out with our friends.

The answer, as it turns out, is that one person should pay the entire bill, and that the people involved should take turns paying over time. Here is the logic: When we pay—regardless of the amount of money—we feel some psychological pain, which social scientists call the “pain of paying.” This is the unpleasantness associated with giving up our hard-earned cash, regardless of the circumstances. It turns out that the pain of paying has two interesting features. First, and most obviously, when we pay nothing (for example, when someone else foots the bill) we don't feel any pain of paying. Second, and less obviously, the pain of paying is relatively insensitive to the amount that we pay. This means that we feel more pain of paying as the bill increases, but every additional dollar on the bill pains us less. (We call this “diminishing sensitivity.” Analogously, if you add one pound to an empty backpack, it feels like a substantial increase in weight. But adding a pound to a backpack that's already laden with a laptop and some books does not feel like a big difference.) This diminishing sensitivity to the pain of paying means that the first dollar we pay will cause us the highest pain, the second dollar will cause us less, and so on, until we feel just a tiny twinge for, say, the forty-seventh dollar.

So if we are dining with others, we are happiest when we pay nothing (free!); we are less happy when we have to pay something; and the additional dollars we fork over cause us a smaller and smaller additional amount of pain as the size of the bill increases. The logical conclusion is that one person should pay the whole bill.

If you're still unconvinced, consider the following example: Imagine that four people share a meal and the bill comes to $100. Now, if everyone at the table pays $25, every person would feel some pain of paying. In order to make this less abstract, let's assign “units” as a measure of this pain. We'll assume that paying $25 translates into 10 units of pain for a total of 40 units of pain for the whole table when it comes time to split the bill. But what if one person pays the entire bill? Since the pain of paying does not increase linearly with the amount of payment, the person who is paying will feel 10 units of pain for the first $25 that he or she pays; maybe 7 units for the next $25; 5 units for the next $25; and 4 units for the last $25. The total of 26 units of pain lowers the amount of pain for the entire table by 14 units. The general point is this: we all love getting our meals for nothing, and as long as we can alternate payers, we can enjoy many free! dinners and derive greater overall benefit from our friendships in the process.