some time ago I met a locksmith who lives not too far from me in Durham.
And he told me the following story. He said that when he as just practicing
locksmith, he was not very good. He said it would take him a long time to
get into people's locks. And often because he was not that good, he
also had to break the lock. So after a long time of trying to figure
weather if you would break the lock, then he would replace it.
And he charged people for the standard fee of opening the door, he would charge them
for the lock, and people had paid him happily and gave him a tip.
He said after two years, he got really good at it.
And now that he's really good, it takes him minutes to open a lock, he said he
never breaks it. So he charges people less, just a standard
fee for opening a door. And now he says, nobody gives him a tip
anymore, and everybody argues with him. Now, here's a situation.
Which one would you prefer from a utility perspective?
Which situation would you prefer? When somebody takes an hour to open your
door, or when somebody takes two minutes? Of course the two minutes is better,
because if it's two minutes you only have to stand outside for two minutes, you're
in your house. If somebody goes away you don't have to
worry. But how would you feel about paying that
person. If you see somebody struggling, and
working and sweating outside of your house for an hour, you'll probably feel much,
much better about paying them more and even giving them a tip.
There's this mediocre joke that says that somebody who drives a car to the mechanic
and he said oh you know my car is not running very well, there's a noise from
the engine, I'm not sure what it is? So the mechanic says open the hood, the
person opens the hood, the mechanic looks at it, takes a hammer, bangs on a
particular pipe, voom, the car is driving perfectly, the noise is, is gone and the
mechanic said, that would be a $100. The person says a $100 for banging with a
hammer on a, on a pipe? And the mechanic said, no, no, no, the
banging is $1 knowing where to bang is $99 Now, that's not the really funny joke.
But, the idea is, that it's hard for us to pay for expertise.
Right? Somebody could be an incredibly good
locksmith, but we just don't feel good about paying for that expertise.
But if we somebody sweating and working for a long time, all of a sudden we feel
better about the whole thing. We did a couple of experiments on this
topic. And one of them, we asked people how much
they would pay us to recover information from their hard drive.
And, we asked them to think about losing one day of information, one week of
information, two weeks, four weeks,ah, three months, six months, a year of data.
So, lots of different amounts of data they lost.
And you know what? People in general were willing to play
more money for more data recovery. That's good news.
But you know what people really cared about?
Was how long the technician worked on it. If the technician worked for five minutes
to recover the data, they were not willing to pay so much.
If the technician was working for a day, much more, for a week, Much more.
So, in a sense what we're doing is we're paying for incompetence.
The longer people take to work on something, the more we feel we're willing
to pay for them. And when somebody's high skilled and we
don't see it, we're not willing to pay for this.
By the way fairness is also the big problem with the internet.
Think about big organization the New York Times.
What, what do we think is fair to pay. Do we know anything about he size, of
course not. Or, think about something else.
In the old days when you use to come to a teller, and you would write a check, and
they would give you cash. You saw somebody, you're willing to pay
for this privilege. You saw that there was a person across the
window from you. You saw that they were doing something.
You were doing something. You took some of their time.
It was perfectly okay to pay them for their time.
But now it's an ATM. You just put your card in and money comes
out. You don't see that you cost anybody
anything, and because of that people feel really outraged by having to pay these
fees. Now, what this also tells us is that
fairness in many ways is about marginal cost, not about fixed cost.
If an organization paid lots of money to create something and now every additional
unit of delivery is free, as we think about in the internet We don't feel
fairness needs to pay for it. But if the fixed cost is low and all of
the cost is marginal cost, now we think there's a need for us to pay for it.
So again, imagine The New York Times. Imagine that the technology was such that
the investment in the infrastructure was very low, but every time you would read
the newspaper you would cost The New York Times a dollar.
Now you would feel very bad about reading the New York Times free without paying for
it. But if it's a fixed cost, they pay lots of
money to create it but the marginal cost is zero, the notion of fairness is not
coming along at all. So this kind of, couple of interesting
points here. One Is that we do want to express to
people the amount of hard work. If you're the locksmith, you want to show
your hard work. If you're the New York Times, you might
want to show people you're hard work. If you're the mechanic, you might want to
show people their hard work. But on top of that, there's also the
question of how much of your effort is fixed cost and marginal cost.
And when fixed cost is concerned, it's incredibly harder to get people to care.
To feel people any kind of need for reciprocation because of fairness any need
to pay for this. The final story I want to tell you about
fairness is the following: There was a plan in the Coca Cola factories in Brazil
to start charging for Coke depending on the temperature outside.
And they basically had this Coke vending machine and it was supposed to change the
price of Coke based on the time of the day and the temperature outside.
And if you think about it, it's a perfect mechanism.
Why? Because as the temperature goes up, the
joy from Coke goes up and you should be willing to pay more.
But what happened? People were outraged.
They were so outraged that the person who envisioned this idea had to resign, from
Coke. And why were people outraged?
Because they did not see any increase in cost as a function of the temperature.
Right, furnace is not about how much money you can charge me.
Fairness is about the relationship between how much something is costing you and how
much I'm willing to pay. Costing in terms of money, in terms, in
terms of time and so on. And, and because of that people are
outraged. And they had all kinds of ideas.
They said, what if when I got close to the machine, it would scan my eyes, and it
will identify exactly how thirsty I am? And it will set the cost exactly in the
way that will be a cent below my maximum willingness to pay?
And people were outraged with that. By the way, it's the ideal economic
vision. Right?
You prize people exactly like that, but people are outraged.
Now imagine the following, and you can just imagine that.
What would happen if Coke said, we're not just charging you more because we can,
we're charging you more, because we have to spend more electricity.
It's more expensive for us as the temperature goes up to cool The, the
vending machine to keep the cold coke in a cold temperature and therefore we're
paying you more for that. Now it would not be perceived as coke is
just gauging you depending on your temperature, it would be an argument for
fairness. Basically saying these are pass through
costs, it's not us charging you. And you know, we're all willing to pay
that. For example, we're willing to pay more For
some beer in the hotel that we're willing to pay for beer in the grocery store,
because we know hotels have higher costs. Airlines, by the way, sometimes increase
their prices and saying in calling these prices, rather than price increase, they
call them taxes. By the way, if you look, at different
airlines, you will see the different airlines for the same route, have very
different taxes. Why do they have different taxes?
Because taxes are not considered part of the price.
They're basically saying the government is charging us that.
Of course, the government is not charging different airlines different amounts.
But some airlines are taking the amount of increase, they are calling it taxes, and
then to us as consumer, it looks like pass-through cost and we don't blame The
airline's for it. So if you think about fairness, the main
point is that when we are buying something, we should think about what are
we getting, and how much does it cost us. And if something is giving us more
pleasure than the cost, we should buy it, and if something is giving us less
pleasure than the cost, we should not buy it.
The problem is it's really hard for us to figure out what something is worthwhile,
how much pleasure it's giving us. So we're using all kinds of other
techniques, all kinds of other heuristics and strategies.
Fairness is one of them. And fairness is not asking how much
pleasure am I getting from something, it's saying how much work and effort has gone
into this thing. And if there's been more effort, I'm
willing to pay more for it. And if it's less effort, I'm willing to
pay. Less for it.
And depending on the industry you're in and the industry you're going to go into,
expressing effort is either a benefit or it's either easy for you to do, or hard
for you to do, it's something you should do more, or you should try to at least
think about how to do. And, so think about fairness It's an
amazing im, important idea. And if we can only understand it better, I
think we could get people to make very different decisions.
One other interesting story about fairness is the following.
Imagine you're at the beach with friend of yours.
It's wonderful day, the temperature is great.
The ocean is fantastic, and your friend tells you that they're going to get some
beer and do you want some. And you say yes, I want some.
Then your friend says look, I'm going to and get beer but I don't know how much it
will cost. So tell me what's the maximum amount that
you will pay. If they'll charge more than that, I will
not get the beer. If they charge less, I'll pay for it, and
then you'll give me back the money, whatever they, they charge.
Okay. So now your task is to say, what is the
maximum amount of money you're willing to pay for beer?
And the friend is either telling you they're going to a hotel, of they're going
to a grocery store. What will happen?
People give a much higher amount to the hotel than to the grocery store.
Why? Because the joy of drinking beer on the
beach changes depending of where the beer came from?
Of course not. If it were, you know there would be trucks
of beer, or going through lobbies of hotels just to increase the quality of the
beer. The beer is the same, but what happened is
you're notion of fairness enters into the process.
You're not just thinking to yourself how much am I going to enjoy sitting on the
beach here and drinking beer. You're saying also what is a fair price.
And if the bill comes from a hotel, your fairness includes the cost of running a
hotel and your willingness to pay, goes up with it.
So, if you think about all these stories about fairness, what they really tell us
is that our understanding of how much we're willing to pay for something, should
in principal comes up from comes from how much value we're getting from it.
We're getting more value, we should be willing to pay more.
We're getting less value, we should be willing to pay less.
But the reality is, that directly assessing how valuable something is: how
much do we enjoy beer, how much are we enjoying getting our doors opened, our
computers recovered, a Coke. All of those things are incredibly hard,
so we're using shortcuts. And one of those shortcuts Is to say how
much effort has been created for me to consume that and if the effort is high
willing to pay more and if the effort is lower willing to pay less.
And it means that as consumers you probably want to think about effort a
little less if you think of it as a biasing tool that gets you to pay too much
or too little based on the effort you want to try and overcome it.
And as producer you might want to say how do I signal effort.
How do I tell peolple how much effort went into it because effort is the main
mechanism, or one of the main mechanisms by which people are going to decide how
much ot pay for something. And as we move into the internet economy,
effort is harder and harder to think about.
Fairness is harder and harder to think about it.
More things are becoming about high fixed costs and low marginal costs.
Most things are hidden, we don't see what, what goes into them.
How, how many hours go into creating a piece of software, for example, or an app.
And, and all of this creating new challenges for effort, the expression of
effort because of that fairness and because of that willingness to pay.