The inexplicable appeal of “Free!”

1. The inexplicable appeal of “Free!” Non-standard decision making Behavioral Economics Udayan Roy

2. 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 • Reading: Chapter 3 (The Cost of Zero Cost) of Predictably Irrational

3. Chocolate Experiment • Students were offered the opportunity to buy one chocolate per person at reduced prices • Here are the results:

4. 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.

5. 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!

6. 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

7. Free drives us crazy • Clearly our ability to make rational trade-offs is completely gone when something reaches the magical price of “free!” • http://www.youtube.com/watch?v=LmJzQ3cVt88