The price of free

Marketplace Staff Jan 4, 2010

The price of free

Marketplace Staff Jan 4, 2010


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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