Makin' Money

The price of fairness

Chris Farrell May 13, 2011

Our guest blogger is Dan Ariely, professor at Duke University’s Fuqua School of Business.

Ariely’s interests are reflected in the title of his two books, Predictably Irrational *and *The Upside of Irrationality. However, my favorite accomplishment is that he’s a founding member of the Center for Advanced Hindsight! His goal is to help us live more sensibly, if not rationally.

Dan Ariely: I recently had an interesting meeting with a locksmith:

As I mention in the video, what’s really interesting is that this locksmith was penalized for getting better at his profession. He was tipped better when he was an apprentice and it took him longer to pick a lock, even though he would often break the lock! Now that it takes him only a moment, his customers complain that he is overcharging and they don’t tip him.

If we stop and think about how we should value good and services, the answer is very simple: We should evaluate goods and services based only on the value that we expect to get from them (what economists call the utility).

Low expectations means that we would pay at most a very little amount of money, and high expectations means that we will pay a lot. But, what the story with the locksmith illustrates is that one of the main drivers of our evaluations and decisions about payment has to do with fairness.

If we see someone working very hard and sweating for a long time we feel that we should pay him a lot, and if someone does the same thing in a few seconds and without a drop of sweat we don’t feel that it is right to pay them much. What this means that we are often happier paying for incompetence (paying more for the person who is not good at their job), which is one of the consequences of using fairness as a guiding light for how much we should pay.

Now, think about this blog post — how would you evaluate it if you knew that I worked on it on the flight from North Carolina to New York, under difficult conditions and in a very uncomfortable seat?

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