Sunday, March 09, 2008

Sunday dollars+sense: But I've got to have it, it costs zero

Last week I mentioned a new book by the behavioural economist Dan Ariely that describes ways in which we are “Predictably Irrational”, the book’s title.

Not only do we base our guess as to what price something should be on the number that most recently passed before our eyes (really, it happened in an experiment I took part in) but we are also decidedly weird about the price zero.

If something is “free” we want it, no matter what it really costs.

He has outlined his findings in an academic paper available (free) on the web entitled Zero as a Special Price: The True Value of Free Products...

In one experiment he asked 60 people to choose between three alternatives. They could either buy (a) a low-value chocolate - a Hershey’s Kiss - for once cent; (b) a higher value chocolate - a Ferrero Rocher - for 26 cents; or (c) nothing.

Around 40 per cent wanted one chocolate, 40 per cent the other, and 20 per cent nothing.

Then he did it again, cutting both prices by just one cent but keeping the relativities the same. The Kiss was free, the Ferrero Rocher cost 25 cents.

The result: almost everyone went for the free Kiss.

As he put it: “A one cent difference in price has an enormous influence on demands if it represents the difference between a positive and a zero price.”

He tried a more complex series of experiments on children who came to his door playing trick-or-treat. In asking them to choose between different combinations of chocolates he discovered that they were unerringly good at calculating and demanding the option that got them the most sugar. Until he presented one of the options (which in fact did have a cost in other chocolate lost) as “free”.

The children jumped at it. It was the only time they failed to calculate the best sugar hit.

And he has discovered that the price “zero” affects us in even stranger ways.

He placed a big box of chocolates in front of two groups of students telling one they were free, the other that each cost 5 cents.

Naturally more students took the chocolates when they were free.

But weirdly when the chocolates were free, most students took only one. When they cost money, the students took more than one each.

Think carefully when someone offers you something for free. Your response won’t be at all rational.

Dan Ariely, Predictably Irrational: The Hidden Forces That Shape Our Decisions, HarperCollins February 19, 2008

Kristina Shampanier, Nina Mazar and Dan Ariely (2007) “
Zero as a Special Price: The True Value of Free Products”. Marketing Science. Vol. 26, No. 6, 742 - 757.