Wednesday, April 23, 2008 4/23/08-FREE!

In today's excerpt--Dan Ariely, Alfred P. Sloan Professor of Behavioral Economics at MIT, examines the effect of the word "free":

"In one experiment ... we set up a table at a large public building and offered two kinds of chocolates--Lindt truffles and Hershey's Kisses. There was a large sign above our table that read, 'One chocolate per customer.' Lindt's chocolate truffles are particularly prized--exquisitely creamy and just about irresistible. They cost about 30 cents each when we buy them in bulk. Hershey's Kisses, on the other hand, are good little chocolates, but let's face it, they are rather ordinary: Hershey cranks out 80 million Kisses a day. ...

"When we set the price of a Lindt truffle at 15 cents and a Kiss at one cent, we were not surprised to find that our customers acted with a good deal of rationality: they compared the price and quality of the Kiss with the price and quality of the truffle, and then made their choice. About 73 percent of them chose the truffle and 27 percent chose a Kiss.

"Now we decided to see how FREE! might change the situation. So we offered the Lindt truffle for 14 cents and the Kisses free. ... What a difference FREE! made. The humble Hershey's Kiss became a big favorite. Some 69 percent of our customers chose the FREE! Kiss. ...

"According to standard economic theory (simple cost-benefit analysis), the price reduction should not lead to any change in the behavior of our customers. ... A passing economist would have said that since [the price difference] was the same, our customers should have chosen the truffles by the same margin. ... The conclusion, incidentally, remained the same in other experiments as well. In one case we priced the Hershey's Kiss at two cents, one cent, and zero cents, while pricing the truffle correspondingly at 27 cents, 26 cents, and 25 cents. ...

"What is it about FREE! that is so enticing? ... I believe the answer is this. Most transactions have an upside and a downside, but when something is FREE! we forget the downside. ... I think it's because humans are intrinsically afraid of loss. The real allure of FREE! is tied to this fear. There's no possibility of loss when we choose a FREE! item (it's free). But suppose we choose the item that's not free. Uh-oh, now there's a risk of having made a poor decision--the possibility of a loss. And so, given the choice, we go for what is free."

Dan Ariely, Predictably Irrational, Harper, Copyright 2008 by Dan Ariely, pp. 51-55.


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