The Irrationality of Free

One of the books I’ve been reading for Economics of Happiness, the best connections class to make you happy (maybe except for the wine-tasting one) is Predictably Irrational by Dan Ariely, who examines some of the incentives and day-to-day interactions we have, how they affect our decisions, and more specifically, how they nudge us towards irrational decisions. One idea that we can’t deal with very well is the idea of free, or costing zero. If something is free, or costs zero, our decision making about that thing changes considerably. Predictably Irrational discusses how when presented with an otherwise great deal on something we want, but also presented with an inferior, but free substitute, we will overwhelmingly be drawn to free substitute, even if we didn’t want it in the first place. One idea behind the cause of this is that we don’t feel the downside of the buying something when its free because it doesn’t actually cost us anything, where as we still feel the hurt of buying something at an actual price, even though we may want it more.

Another instance is when we would ask a friend for a free favor, they are more willing to do it than if we offered them a relatively small amount of money for that favor. This seems to suggest that we separate social norms and market norms, and mixing to the two may not work so well. One example Ariely gives is that if you we’re invited to your relative’s Thanksgiving, its perfectly fine to bring a bottle of wine or some sort of gift, but it wouldn’t be normal to offer your hosts money, even though it otherwise makes sense as a substitute for the thirty dollars you would have spent on wine or a gift.

Ariely conducted an experiment where he first offered some nice chocolate truffles for 10 cents, then later for 5 cents, and then later 1 cent. As the law of supply and demand would tell us, the lower the price, the more people would buy them, and we would also expect that at a lower price, those that did buy truffles would buy more. His findings supported these basic ideas, but then Ariely lowered the price again from 1 cent to zero. What happened? Well, more people did take the free truffles, consistent with supply and demand, however those that did take truffles took less than those who paid for them.

We’ve sort of observed this with our own experiments with handing out free money. Students really don’t know what to do when offered free money. Perhaps if we offered money for money, like if we offered to “buy” their $1 for a $1.50 we would get more people to directly participate.

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