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The price of free
Dan Ariely, author of "Predictably Irrational"
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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.
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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.
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.
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.
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.
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-humbu...
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?
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.
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...
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.
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