The Cost of Zero Cost

This is the second blog in which I refer to the book "Predictably Irrational". The author Dan Ariely through this chapter, exposes the irrational behavior of humans when it comes to discount offers and FREE offers.

When was the last time you stopped by when you saw an advertisement that talked about discount sale or a FREE promotional sale? Not too long ago,I am sure. There is something mysterious about the words "FREE" and "DISCOUNT" that causes excitement in us. No wonder every stall in an exhibition has freebies like scratch pads, post-its, pens to attract consumers. I know some people who visit exhibitions only to collect freebies and give bad feedback on companies that may have the best products but not enough freebies in their stalls. After I started flying Kingfisher airlines I have stopped buying pens as I have stock pile of silver and red pens that I been collecting from the free-kit that the airline gives.

The malls and stores in USA have exploited this irrational exuberance by having "SALE" earmarked for every week of the year. Thank GOD we have only 52 weeks in a year !. One of my weekend chores, when I was in USA, was to skim the reams of advertised fliers that come with the newspaper and identify the best deals of the week. In the excitement, that I get a terrific deal, I end up buying things I do not really need - just because it is available at a discount. My wife recently purchased shirts for me that were on sale - Buy 1 Get 1 FREE. She bought a trouser to match the shirt and the shopkeeper showed her another offer - Buy 2 and Get 3 FREE , and she took the bait. I ended up with more clothes than I needed and also payed more for them.

The "Predictably Irrational" book talks about an experiment wherein the author gives Hershey's kisses chocolates to the kids during the Halloween festival. He then offers to exchange one Hershey's kiss chocolate for one big Snicker bar OR getting a small Snickers bar for FREE. There is no prize for guessing what the kid chose - Of course , the FREE small Snicker bar. On rational terms the big Snicker bar was a good deal as it has more chocolate than the small Snicker bar and the Hersheys kisses chocolate, put together. This irrational behavior was not restricted only to the kids, the same experiment done with MIT students yielded a similar result.

So do you think you have a handle on FREE !? OK. Here's a quiz. Suppose I offered you a choice between a free $10 Amazon gift certificate and a $20 gift certificate for seven dollars. Think quickly. Which would you take ? If you jumped for the FREE! certificate then you are like most of the people. A close look would reveal that $20 gift certificate for seven dollars delivers a $13 profit. That's clearly better than getting a $10 certificate free. This is the irrational behavior in action. ( Note : This paragraph was taken verbatim from the book, as I did not want to rewrite and lose the impact that the original paragraph had.)

What is it about FREE ! that's so enticing? Why do we have an irrational urge to jump for a FREE item, even when it's not what we really want? The possible answer to this is that, most transactions have an upside and a downside, but when something is FREE! we forget the downside. Humans are intrinsically afraid of loss, so when we see no visible possible loss when we choose a FREE item, we grab it. But the loss takes invisible forms like the time wasted going after the FREE offer. I was once a victim to this act.

When we visited Orlando for a long weekend to go to Disney world and Universal studios, we were lured into an offer of discount tickets to these amusement part if we attended a presentation by the real estate agent who was selling time-share apartments. Even though I was in USA on a temporary assignment and was not interested in any real estate, the lure of discount coupons made me accept the invitation. We ended up spending almost half-day attending the presentation and visiting the model apartments. Even though we saved few tens of dollars we lost precious hours of entertainment at the Universal studios.

The irrational behavior around the word FREE ! can be used positively to drive social policy. If the registration fees for electric cars are made zero (FREE) then it would make more people buy them. If the critical health checkups are made FREE it may get more people to go through them and early detection of severe illness is good for the individual and the hospital (they will get to treat them). It is during these tough economic times that "FREE" offers from governments can boost the economy. One such example is what the German government did - It offered 2500 Euros to people who junked their old cars to buy new ones. Sales of cars did pick up after this offer.

But as a consumer I am more conscious and avoid going for any shopping that has a big SALE sign written all over its face. I prefer to do internet shopping so that I can buy only what I want ( I do look at the advertisements that pop-up, but they are not as enticing as the SALE I see in the malls/stores). While I control myself, I have to admit that I have little control on the irrational shopping behavior of my wife :-).

- Ram