The price of free
Everybody likes a good discount, but people respond differently when items are free. Behavioral economist Dan Ariely talks with Kai Ryssdal about why we show restraint for things that don't cost us anything.
Dan Ariely, author of "Predictably Irrational" (Dan Ariely)
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Dan Ariely and his colleagues want to know how you feel about wealth distribution. Results of this survey will be part of Dan's next conversation with Kai Ryssdal.
TEXT OF INTERVIEW
Kai Ryssdal: Everybody likes a good discount. And if you were brave enough to go to the mall the past week or so, you probably saw a lot of people enjoying the post-Christmas sales, stuffing their shopping bags full, trying to get as much for their dollars as possible. But if the stuff in question had been free, our favorite behavioral economist Dan Ariely says there might have been a different story. Dan, it's good to have you back.
DAN ARIELY: It's a pleasure always.
Ryssdal: So in my book, cheaper prices are good, yes? Is that what you're learning here?
ARIELY: In general yes, but there's some interesting exceptions. And the most interesting one is the price of free. Imagine that one of your co-workers comes to the office with home-baked cookies, and she's offering you the cookies for a very cheap price. Let's say 5 cents per cookie. And she has 100 cookies on the tray, and there are 20 people in the office. How many cookies will you take?
Ryssdal: I'd probably take like five. I'd give her a quarter, and take five cookies.
ARIELY: OK, but what would happen if it was free?
Ryssdal: Well, now see, I'm torn here, because I would either take a lot and be a real piggy, or I would take maybe one or two because I wouldn't want to be a glutton.
ARIELY: That's right. So let's assume that you would not feel like being a pig. In fact you can actually imagine how if she offered you the cookies for 5 cents a piece, you would feel perfectly fine to take the whole batch, but if she charged you nothing, you would not feel that you can take as much as you really want.
Ryssdal: Is this about the value we put on it, or is it about us internally?
ARIELY: It's about the fact that when something is free all of the sudden different norms get applied to the situation, and you start thinking about other people. So you have lots of other co-workers in the office, and if you took all the cookies to yourself, nobody else would have any cookie. What's interesting is that when the price is a positive price, like 5 cents, you don't actually think about the welfare of other people.
Ryssdal: You bet, because I've paid my nickel and by gosh, I'm going to take as many cookies as I want, right?
ARIELY: But you know this is a good deal. And you have lots of other people in the office that you like and care about. Why don't you think about their welfare? Don't you want them to be happy as well?
Ryssdal: Yeah, I suppose. But you know, if the cookies are good, then...
ARIELY: But the cookies are also good when they're free. So what's interesting is when something is free you all of the sudden think about the welfare of others. But when it costs something, it's just you and your cost-benefit analysis.
Ryssdal: All right, so take it away from my cookies and me looking out for the welfare of the office, and apply it to real life, then.
ARIELY: Well, cookies are real life. This thought, this general idea, I think also has application for the carbon-trade idea.
Ryssdal: Carbon trade as in global warming. We're going from cookies to global warming?
ARIELY: Obviously, what other connections would you make? So think about it, pollution, carbon trade, or recycling, or whatever it is, is in the public goods domain. We think about our kids, the next generation, the welfare of the world. But if it's not costing us money now we start to apply different norms and different rules. Now I don't think about the welfare of others. It's just about what is it worth for me to pollute and not to pollute. I'm actually worried that when we move from a system that we care about our pollution and CO2 emissions, and so on, because of the welfare generally of the world, we're going to apply a certain norm. If they charge us a lot of money then of course we would be very careful, and we might try to reduce dramatically pollution. But if they don't charge us that much, it could actually end up backfiring.
Ryssdal: Right, so you're worried that the politicians won't be able to agree on a higher price of carbon, so it will be something so small as to be meaningless and maybe even harmful?
ARIELY: That's right. If we started charging a lot of money for it, it would really dramatically change the economy, and I don't think we understand how this will work. And at the low level I think that rather than getting us to care more, it will actually end up getting us to care less.
Ryssdal: Only on Marketplace. Chocolate chip cookies to global warming. Dan Ariely teaches behavioral economics at Duke University. His book is called "Predictably Irrational." Dan, thanks a lot.
ARIELY: My pleasure.
Comments
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01/08/2010
Those who say this argument is flawed because the people running corporations are immoral are much more off base than they say Ariely is. SOME people are immoral and overly greedy, others are not.
Even in the cookie example, some people would gladly take every cookie if it were free. Most would not. I think it's a fine example of human behavior. Corporations are only comprised of people, and it seems that we often forget this. Corporate entities are nothing more than pieces of paper in filing cabinets. It's the people in them that count.
From CA, 01/07/2010
And yet as we see from 01/06 story about the British NHS, Ariely's logic does work for people. Just not for corporations with all the rights but none of the responsibilities of people.
From MD, 01/07/2010
I have to agree with VanderSchaff and Moff, but go even further. Ariely's analogy between cookies and carbon trading is not only seriously flawed, but dangerously naive. Large corporations don't behave like individuals and their impact is generally greater. For example, Beatrice Foods and W. R. Grace (see movie "A Civil Action"), HealthSouth, Enron, ADM (price fixing)...need I continue? Corporations first responsibility, by definition, is to their shareholders, not the public at large which puts a different set of pressures on them than on individuals. That is why we needed Sarbanes-Oxley, Clean Air Act, Clean Water Act, and other regulatory legislation as a check on corporations' focus on profits over public and to protect the public from corporations who seek to privitize the profits and socialize the losses.
From MD, 01/06/2010
One problem I have with this study is what we know about the tragedy of the commons and overgrazing. With the tragedy of the commons, the common area is destroyed because there is no cost to use it. This is the problem we see with overfishing. I suppose this is because this is a scarce resource rather than an item, but it is still an interesting comparison.
From Long Island, NY, 01/06/2010
Interesting but the cookie example only works because you know your coworkers. When anonymity is brought into the equation things are different. Two quick examples are workplace fridges and NPR. We all know that food and drink are not always safe in a workplace fridge, even if clearly labeled with a name. And of course a lot of people listen to NPR without donating. Both of these rely on the fact that no one knows who is doing it.
From Los Angeles, CA, 01/06/2010
Professor Ariely hits the nail on the head with his analogy. While we currently suffer from the "tragedy of the commons" where polluters don't bear the costs of their conduct, pricing these externalities too low could result in an incentive that is the converse of the intent.
I've also enjoyed Dr. Ariely's insights on the now predictably irrational ways we respond to "free" vs. really really cheap. Here's an example from a case where something is expected to be free, but isn't. Predictably irrational as well?
http://www.brandculture.com/index.php?blog=/blog/2009/12/brand-bah-humbug-scrooge-lives-at-heath-ceramics/
01/06/2010
I think Dan forgot all about scarcity. 100 cookies per 20 people? Free or not, you won't take many, assuming there will be some left on the plate when you make a second pass at the lunch room...and thus avoid looking like a piggy.
Maybe if instead of 100 cookies, there were only 40...would people take more, free or not, assuming there will be shortage in the future? Ask someone who grew up in Communist Russia.
Now, let's talk about 20 cookies, in an office where there are many diabetics. How many will take an extra cookie, thinking they are saving their diabetic coworkers from temtpation?
01/05/2010
I think Dan is scretching his research beyond the breaking point. In things like the carbon tax or cap-and-trade we are already well out of the realm of 'free'. Polluters already pay for materials, and already have a finacial, cost/benefit mindset. If the cost of gas goes from $3 to $3.05, it doesn't matter if that 5 cents was a 0 cent tax going to 5, or a 10cent tax going to 15.
From Seattle, WA, 01/05/2010
I think you guys are great and I love listening to Dan Ariely. I was just wondering why his cookie-baking co-worker was female. Granted, women are more prone to baking cookies, but I wonder if he was to use an example of, say, an attorney, if that would have been female or male. Petty I know. But still...
01/05/2010
I don't agree with Dan's idea.The reason why you won't take all the free cookies is that you think about others.But now,people want to make money so they pollute environment.They only think about their money other than the whole world.If they are not fined for pollution,they can get more frofits,so they will continue to pollute the environment.
From NJ, 01/05/2010
The problem with cap & tax is that we are explicitly giving a company permission to pollute.
Today, a company that pollutes can be held to public scrutiny. With cap & tax, a company can say "We have done nothing wrong by polluting. Here's our piece of paper from the government that says so."
This story made perfect sense.
From Baltimore, 01/05/2010
As a marketer, one hears the adage "The most powerful word in marketing is 'FREE.'" This article forces one to reconsider that. Though I did read somewhere that the 2 most powerful search terms right now are "free shipping." Interesting change of paradigm. Wonder what would happen if we converted to insanely inexpensive offers in marketing? I'd hypothesize that since we don't really consider the world of "other" probably in that decision process, it would have no or ill effect vs. FREE. Does Mr. Ariely have experience with that?
From Newton, MA, 01/05/2010
Dan Ariely's demonstration of our response when something is free applies to health care. It is the reason universal coverage single payer systems hold down costs. Everyone participating understands that the resource needs to be shared,and trusts that will result in the best care for all. And in fact, it does result in better care for the population than our (so called) system.
From VA, 01/04/2010
First - MarketPlace is great - keep it going. Second: The price of 'free' or 'low' is quite interesting and as Kai Ryssdal asked Dan Ariely - How does it apply to real life? an example: Trying to make mediation available to everyone, was charging below the rates of others and clients were not all that many. One day, decided up more than double the hourly rate just to see what would happen. New clients didn't even blink and more referrals came. Bottom line of the American psyche: The more you pay, the better it is.
From South beloit, IL, 01/04/2010
Lelan sums up the real science and
taxes best.
From Vista, CA, 01/04/2010
I agree with Stephen Loughin and W. Moff. I love Dan Ariely's pieces most of the time but you cannot relate a person with a conscience to corporations which are not only amoral at best but have a legal requirement to give priority to making money for stockholders.
From Kalamazoo, MI, 01/04/2010
The price of free article was interesting. The survey that assumes somebody assigns wealth to individuals as chunks of a society, however, seems to assume first that some central entity decides how much of what is available in different subsets of the population and second that people can make decisions about that distribution based on... nothing whatsoever. Perhaps I became disgusted too quickly; hopefully the conversation that results from the survey will clarify.
From Milan, MI, 01/04/2010
As far as cookies are concerned, they are unarguably good (depending on the baker's skill), and my rationalization for the difference between free and cheap cookies is that free homemade cookies are pure altruism on the part of the baker, and it would be better to let others share. I think I would treat very cheap cookies the same way as free ones, but they also portray an additional motive toward profit (or at least recouping costs) on the part of the baker, and helping to ensure that all the cookies sell could partially offset the harm of selfishly hoarding the cookies for myself.
As far as pollution goes, in the current debate, requiring reductions in CO2 emissions is about as far from "unarguably good" as you can get. If politics is a bakery, carbon cap-and-trade is a batch of Hagrid's rock cackes (from Harry Potter), utterly inedible to any but giants, to be avoided even if you paid us to try them.
From CA, 01/04/2010
Kai, I love this guy! He makes economics fun! Keep inviting him back!
Cookies, what a concept!
From Philadelphia, PA, 01/04/2010
I very much appreciated Dan Ariely's point that price -- or lack of it -- can bring an individual's moral compass into play when making a purchase. However, to extend this to a cap-and-trade carbon market doesn't work. The reason is that carbon offsets will be purchased by corporations, not individuals, and corporations have a long history of making immoral and unethical choices when profits are at stake.
From Asheville, NC, 01/04/2010
Interesting story. I think that Dr. Ariely is onto something.
I like to shop at yard sales and a Goodwill clearance store that charges a low price by the pound. I feel no guilt about buying a bunch of clothes. Judging from other people's purchases, they feel fine about "buying" lots of things too.
But by the same token, I would feel guilty taking clothes from a charity giveaway when I can get them cheaply at a yard sale.
In this case, the result is good for everyone and the environment because the things get re-used.
It would be neat to do a study about the cookies within a group, comparing costs of 5c/cookie vs. maybe $2.00/cookie vs. free. See if anyone thinks about watching their diet, and at what price levels they are conscious not only of others but also watching their own calories.
I notice that some people are willing to pay a considerably higher price for food that meets their values i.e. organic.
01/04/2010
Dan Ariely, who usually has something interesting to say, is way off base with his “The Price of Free.”
He worries that if pollution cap and trade prices are set too low, economic tendencies will remove a wonderful current concern about the environment. But for the most part, industries pay nothing for their pollution—and NEVER have. Among the big polluters, there is no guiding environmental concern that is in danger of evaporating. They dump their pollution in our air, water and soil, pushing the cost onto all of us: they don’t care.
I happen to think a hefty phased-in carbon tax would be a much better solution than cap and trade, but the point is the same.
From LOS ANGELES, CA, 01/04/2010
This idea of free and low prices don't sell as well as a padded price was used in a book, "You Can Negotiate Anything" 30 years ago. If a known luxury vehicle sold for $399 most people who could afford the vehicle at regular price would not be interested.
As a people, we must demand that products be made of bio-degraable material or must be recycled to make the same or different products. Taxing the public aggravates the rich and hurts the poor.
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