The Price of Free
Consider if you will the two bowls of chocolate here before you. On my right, you will see a bowl of expensive Ghirardelli chocolates. On my left, you see a bowl of common Hershey’s Kisses. Both of these foil wrapped sugary bundles of cocoa and milk can be used to satisfy similar urges, but there is something very different about them besides just their molded shape.
You see, for tonight only, I’m giving you, my fair audience here at Toastmaster’s, the opportunity to purchase one of piece of chocolate for an extraordinarily small sum of money. The Ghirardelli pieces are but a mere $0.15 and the Hershey’s Kisses are a mere $0.01. You won’t find deals like this just anywhere!
Now, I’m going to raise each bowl and when I raise the bowl which contains the chocolate you would prefer to buy, I’d like for you to raise your hands to show which you want to buy.
First the Hershey’s…
And now the Ghirardelli.
Now, just as I thought would happen, most of you in here are chocolate connoisseurs and picked the Ghirardelli. There is a reason I call this club home!
(Alternate… you all disappoint me greatly! How have I been coming here for nearly 4 years now when you are all so different from me! I know I am a chocolate snob, but really? A Hershey’s kiss? Unbelievable!)
You see, this little survey isn’t my idea. In fact, I read about it in a book entitled Predictably Irrational, by an author named Dan Ariely. He’s a behavioral economist and he studies how people make decisions and tries to understand why we make the decisions we do.
So what did Dan learn when he did this experiment? When people are confronted with the same choice I offered you, 73% of people select the higher priced chocolate and the remainder pick the lower priced chocolate. Frankly, this proves we are rational beings (or most of us anyway), we know a good bargain when we see one and we make wise decisions.
Lets go back to Dan’s chocolate experiment, but this time, lets have a bit of a price change. We still have our same two bowls of chocolate, but now we decrease the price of both products by a penny. The Ghirardelli is now $0.14 and the Hershey’s Kisses are FREE!
Now, a quick vote again…
First the Ghirardelli…
and now the Hershey’s…
When Dan’s subjects saw this experiment, 69% selected the Hershey’s Kisses and the remainder selected the expensive chocolate. The percentages almost completely reversed.
This shows you the price of free. See, the price difference in both situations was $0.14. The outcome in both situations was that you ended up with a piece of chocolate. The only real difference in the scenarios is that one had something for free and the other did not.
Why is this important? First, it shows off exactly how irrational we really are. Most people prefer a better quality of chocolate, but when offered an inferior piece of chocolate at zero cost, many will sacrifice quality in order to gain the gratification of getting something they really didn’t want, but getting it for free.
With the cost so little, and there being no real difference between how much you pay in either situation, it seems that free really does have a price.
This is something that impacts our life in lots of little ways. Lets say that you’re about to select a new bank. You’ve narrowed the field down to two banks. The first offers a checking account with no minimum balance and a small interest rate where the second offers a checking account with a $500 minimum balance, no interest and a free toaster! Which is the better deal? Most people would here the ‘free’ in the second offer and are more likely to rate that as the better account despite the likelihood of the second account costing more in the long term.
On your last trip to the grocery, what did you see on the labels of products? 'Fat Free!’ 'No Calories!’ 'No Cholesterol!’ 'No Flavor!’ (Ok, I made that last one up). These are all methods to get you to purchase something by making you believe that you are getting something extra when in reality you are getting nothing.
So how to we get out of this fallacy of believing that free is better? Ariely doesn’t have a lot of specific advice, but the best piece is to spend time asking two questions: First, what are the real costs of this transaction and second, what is the behavior that someone is trying to invoke in us by triggering our 'free’ response.
Now, the question I know you all have been wondering since I started this speech and the answer is “YES! I’ll be passing out the chocolate in just a moment!” and I won’t even charge you as I said I would earlier. Before I do that though, I want you all ask yourselves one question as you open the foil wrapper… what is the behavior I am trying to invoke in you by triggering your 'free’ response!