1 00:00:00,208 --> 00:00:06,180 some time ago I met a locksmith who lives not too far from me in Durham. 2 00:00:06,180 --> 00:00:13,015 And he told me the following story. He said that when he as just practicing 3 00:00:13,015 --> 00:00:18,600 locksmith, he was not very good. He said it would take him a long time to 4 00:00:18,600 --> 00:00:22,930 get into people's locks. And often because he was not that good, he 5 00:00:22,930 --> 00:00:26,060 also had to break the lock. So after a long time of trying to figure 6 00:00:26,060 --> 00:00:28,880 weather if you would break the lock, then he would replace it. 7 00:00:28,880 --> 00:00:33,365 And he charged people for the standard fee of opening the door, he would charge them 8 00:00:33,365 --> 00:00:37,199 for the lock, and people had paid him happily and gave him a tip. 9 00:00:37,200 --> 00:00:40,260 He said after two years, he got really good at it. 10 00:00:40,260 --> 00:00:44,352 And now that he's really good, it takes him minutes to open a lock, he said he 11 00:00:44,352 --> 00:00:47,230 never breaks it. So he charges people less, just a standard 12 00:00:47,230 --> 00:00:50,543 fee for opening a door. And now he says, nobody gives him a tip 13 00:00:50,543 --> 00:00:54,637 anymore, and everybody argues with him. Now, here's a situation. 14 00:00:54,637 --> 00:00:58,150 Which one would you prefer from a utility perspective? 15 00:00:58,150 --> 00:01:01,539 Which situation would you prefer? When somebody takes an hour to open your 16 00:01:01,539 --> 00:01:05,172 door, or when somebody takes two minutes? Of course the two minutes is better, 17 00:01:05,172 --> 00:01:09,048 because if it's two minutes you only have to stand outside for two minutes, you're 18 00:01:09,048 --> 00:01:11,648 in your house. If somebody goes away you don't have to 19 00:01:11,648 --> 00:01:15,043 worry. But how would you feel about paying that 20 00:01:15,043 --> 00:01:17,470 person. If you see somebody struggling, and 21 00:01:17,470 --> 00:01:21,541 working and sweating outside of your house for an hour, you'll probably feel much, 22 00:01:21,541 --> 00:01:24,612 much better about paying them more and even giving them a tip. 23 00:01:24,612 --> 00:01:28,139 There's this mediocre joke that says that somebody who drives a car to the mechanic 24 00:01:28,139 --> 00:01:31,250 and he said oh you know my car is not running very well, there's a noise from 25 00:01:31,250 --> 00:01:35,674 the engine, I'm not sure what it is? So the mechanic says open the hood, the 26 00:01:35,674 --> 00:01:40,066 person opens the hood, the mechanic looks at it, takes a hammer, bangs on a 27 00:01:40,066 --> 00:01:44,962 particular pipe, voom, the car is driving perfectly, the noise is, is gone and the 28 00:01:44,962 --> 00:01:50,324 mechanic said, that would be a $100. The person says a $100 for banging with a 29 00:01:50,324 --> 00:01:54,629 hammer on a, on a pipe? And the mechanic said, no, no, no, the 30 00:01:54,629 --> 00:02:00,643 banging is $1 knowing where to bang is $99 Now, that's not the really funny joke. 31 00:02:00,644 --> 00:02:04,340 But, the idea is, that it's hard for us to pay for expertise. 32 00:02:04,340 --> 00:02:07,401 Right? Somebody could be an incredibly good 33 00:02:07,401 --> 00:02:11,070 locksmith, but we just don't feel good about paying for that expertise. 34 00:02:11,070 --> 00:02:15,614 But if we somebody sweating and working for a long time, all of a sudden we feel 35 00:02:15,614 --> 00:02:19,380 better about the whole thing. We did a couple of experiments on this 36 00:02:19,380 --> 00:02:22,325 topic. And one of them, we asked people how much 37 00:02:22,325 --> 00:02:26,311 they would pay us to recover information from their hard drive. 38 00:02:26,312 --> 00:02:31,319 And, we asked them to think about losing one day of information, one week of 39 00:02:31,319 --> 00:02:36,610 information, two weeks, four weeks,ah, three months, six months, a year of data. 40 00:02:36,610 --> 00:02:40,180 So, lots of different amounts of data they lost. 41 00:02:40,180 --> 00:02:42,754 And you know what? People in general were willing to play 42 00:02:42,754 --> 00:02:45,390 more money for more data recovery. That's good news. 43 00:02:45,390 --> 00:02:47,857 But you know what people really cared about? 44 00:02:47,858 --> 00:02:52,135 Was how long the technician worked on it. If the technician worked for five minutes 45 00:02:52,135 --> 00:02:55,070 to recover the data, they were not willing to pay so much. 46 00:02:55,070 --> 00:02:59,247 If the technician was working for a day, much more, for a week, Much more. 47 00:02:59,248 --> 00:03:02,900 So, in a sense what we're doing is we're paying for incompetence. 48 00:03:02,900 --> 00:03:08,480 The longer people take to work on something, the more we feel we're willing 49 00:03:08,480 --> 00:03:12,165 to pay for them. And when somebody's high skilled and we 50 00:03:12,165 --> 00:03:15,209 don't see it, we're not willing to pay for this. 51 00:03:15,210 --> 00:03:18,699 By the way fairness is also the big problem with the internet. 52 00:03:18,700 --> 00:03:22,767 Think about big organization the New York Times. 53 00:03:22,768 --> 00:03:27,310 What, what do we think is fair to pay. Do we know anything about he size, of 54 00:03:27,310 --> 00:03:30,040 course not. Or, think about something else. 55 00:03:30,040 --> 00:03:34,328 In the old days when you use to come to a teller, and you would write a check, and 56 00:03:34,328 --> 00:03:38,050 they would give you cash. You saw somebody, you're willing to pay 57 00:03:38,050 --> 00:03:41,450 for this privilege. You saw that there was a person across the 58 00:03:41,450 --> 00:03:43,870 window from you. You saw that they were doing something. 59 00:03:43,870 --> 00:03:46,117 You were doing something. You took some of their time. 60 00:03:46,118 --> 00:03:48,480 It was perfectly okay to pay them for their time. 61 00:03:48,480 --> 00:03:53,454 But now it's an ATM. You just put your card in and money comes 62 00:03:53,454 --> 00:03:56,482 out. You don't see that you cost anybody 63 00:03:56,482 --> 00:04:01,038 anything, and because of that people feel really outraged by having to pay these 64 00:04:01,038 --> 00:04:04,271 fees. Now, what this also tells us is that 65 00:04:04,271 --> 00:04:09,717 fairness in many ways is about marginal cost, not about fixed cost. 66 00:04:09,718 --> 00:04:14,905 If an organization paid lots of money to create something and now every additional 67 00:04:14,905 --> 00:04:19,330 unit of delivery is free, as we think about in the internet We don't feel 68 00:04:19,330 --> 00:04:23,550 fairness needs to pay for it. But if the fixed cost is low and all of 69 00:04:23,550 --> 00:04:28,264 the cost is marginal cost, now we think there's a need for us to pay for it. 70 00:04:28,264 --> 00:04:33,165 So again, imagine The New York Times. Imagine that the technology was such that 71 00:04:33,165 --> 00:04:37,520 the investment in the infrastructure was very low, but every time you would read 72 00:04:37,520 --> 00:04:40,699 the newspaper you would cost The New York Times a dollar. 73 00:04:40,699 --> 00:04:45,253 Now you would feel very bad about reading the New York Times free without paying for 74 00:04:45,253 --> 00:04:47,665 it. But if it's a fixed cost, they pay lots of 75 00:04:47,665 --> 00:04:51,825 money to create it but the marginal cost is zero, the notion of fairness is not 76 00:04:51,825 --> 00:04:55,100 coming along at all. So this kind of, couple of interesting 77 00:04:55,100 --> 00:04:58,212 points here. One Is that we do want to express to 78 00:04:58,212 --> 00:05:02,442 people the amount of hard work. If you're the locksmith, you want to show 79 00:05:02,442 --> 00:05:05,172 your hard work. If you're the New York Times, you might 80 00:05:05,172 --> 00:05:09,383 want to show people you're hard work. If you're the mechanic, you might want to 81 00:05:09,383 --> 00:05:12,925 show people their hard work. But on top of that, there's also the 82 00:05:12,925 --> 00:05:16,600 question of how much of your effort is fixed cost and marginal cost. 83 00:05:16,600 --> 00:05:21,054 And when fixed cost is concerned, it's incredibly harder to get people to care. 84 00:05:21,055 --> 00:05:26,690 To feel people any kind of need for reciprocation because of fairness any need 85 00:05:26,690 --> 00:05:30,937 to pay for this. The final story I want to tell you about 86 00:05:30,937 --> 00:05:36,811 fairness is the following: There was a plan in the Coca Cola factories in Brazil 87 00:05:36,811 --> 00:05:42,224 to start charging for Coke depending on the temperature outside. 88 00:05:42,225 --> 00:05:46,952 And they basically had this Coke vending machine and it was supposed to change the 89 00:05:46,952 --> 00:05:50,740 price of Coke based on the time of the day and the temperature outside. 90 00:05:50,740 --> 00:05:53,562 And if you think about it, it's a perfect mechanism. 91 00:05:53,562 --> 00:05:55,988 Why? Because as the temperature goes up, the 92 00:05:55,988 --> 00:05:59,210 joy from Coke goes up and you should be willing to pay more. 93 00:05:59,210 --> 00:06:02,000 But what happened? People were outraged. 94 00:06:02,000 --> 00:06:06,760 They were so outraged that the person who envisioned this idea had to resign, from 95 00:06:06,760 --> 00:06:08,950 Coke. And why were people outraged? 96 00:06:08,950 --> 00:06:13,460 Because they did not see any increase in cost as a function of the temperature. 97 00:06:13,460 --> 00:06:17,189 Right, furnace is not about how much money you can charge me. 98 00:06:17,190 --> 00:06:21,823 Fairness is about the relationship between how much something is costing you and how 99 00:06:21,823 --> 00:06:25,308 much I'm willing to pay. Costing in terms of money, in terms, in 100 00:06:25,308 --> 00:06:28,309 terms of time and so on. And, and because of that people are 101 00:06:28,309 --> 00:06:30,230 outraged. And they had all kinds of ideas. 102 00:06:30,230 --> 00:06:34,070 They said, what if when I got close to the machine, it would scan my eyes, and it 103 00:06:34,070 --> 00:06:38,322 will identify exactly how thirsty I am? And it will set the cost exactly in the 104 00:06:38,322 --> 00:06:42,224 way that will be a cent below my maximum willingness to pay? 105 00:06:42,225 --> 00:06:45,287 And people were outraged with that. By the way, it's the ideal economic 106 00:06:45,287 --> 00:06:45,931 vision. Right? 107 00:06:45,931 --> 00:06:49,780 You prize people exactly like that, but people are outraged. 108 00:06:49,780 --> 00:06:52,987 Now imagine the following, and you can just imagine that. 109 00:06:52,988 --> 00:06:57,224 What would happen if Coke said, we're not just charging you more because we can, 110 00:06:57,224 --> 00:07:00,930 we're charging you more, because we have to spend more electricity. 111 00:07:00,930 --> 00:07:04,806 It's more expensive for us as the temperature goes up to cool The, the 112 00:07:04,806 --> 00:07:09,294 vending machine to keep the cold coke in a cold temperature and therefore we're 113 00:07:09,294 --> 00:07:12,976 paying you more for that. Now it would not be perceived as coke is 114 00:07:12,976 --> 00:07:17,260 just gauging you depending on your temperature, it would be an argument for 115 00:07:17,260 --> 00:07:19,984 fairness. Basically saying these are pass through 116 00:07:19,984 --> 00:07:23,624 costs, it's not us charging you. And you know, we're all willing to pay 117 00:07:23,624 --> 00:07:26,468 that. For example, we're willing to pay more For 118 00:07:26,469 --> 00:07:30,988 some beer in the hotel that we're willing to pay for beer in the grocery store, 119 00:07:30,988 --> 00:07:35,897 because we know hotels have higher costs. Airlines, by the way, sometimes increase 120 00:07:35,897 --> 00:07:40,658 their prices and saying in calling these prices, rather than price increase, they 121 00:07:40,658 --> 00:07:43,330 call them taxes. By the way, if you look, at different 122 00:07:43,330 --> 00:07:46,795 airlines, you will see the different airlines for the same route, have very 123 00:07:46,795 --> 00:07:49,760 different taxes. Why do they have different taxes? 124 00:07:49,760 --> 00:07:52,260 Because taxes are not considered part of the price. 125 00:07:52,260 --> 00:07:54,590 They're basically saying the government is charging us that. 126 00:07:54,590 --> 00:07:58,350 Of course, the government is not charging different airlines different amounts. 127 00:07:58,350 --> 00:08:03,111 But some airlines are taking the amount of increase, they are calling it taxes, and 128 00:08:03,111 --> 00:08:07,527 then to us as consumer, it looks like pass-through cost and we don't blame The 129 00:08:07,527 --> 00:08:11,478 airline's for it. So if you think about fairness, the main 130 00:08:11,478 --> 00:08:16,724 point is that when we are buying something, we should think about what are 131 00:08:16,724 --> 00:08:20,990 we getting, and how much does it cost us. And if something is giving us more 132 00:08:20,990 --> 00:08:24,090 pleasure than the cost, we should buy it, and if something is giving us less 133 00:08:24,090 --> 00:08:25,980 pleasure than the cost, we should not buy it. 134 00:08:25,980 --> 00:08:29,788 The problem is it's really hard for us to figure out what something is worthwhile, 135 00:08:29,788 --> 00:08:33,431 how much pleasure it's giving us. So we're using all kinds of other 136 00:08:33,431 --> 00:08:36,110 techniques, all kinds of other heuristics and strategies. 137 00:08:36,110 --> 00:08:40,140 Fairness is one of them. And fairness is not asking how much 138 00:08:40,140 --> 00:08:44,970 pleasure am I getting from something, it's saying how much work and effort has gone 139 00:08:44,970 --> 00:08:47,410 into this thing. And if there's been more effort, I'm 140 00:08:47,410 --> 00:08:50,200 willing to pay more for it. And if it's less effort, I'm willing to 141 00:08:50,200 --> 00:08:51,724 pay. Less for it. 142 00:08:51,724 --> 00:08:56,018 And depending on the industry you're in and the industry you're going to go into, 143 00:08:56,018 --> 00:09:00,178 expressing effort is either a benefit or it's either easy for you to do, or hard 144 00:09:00,178 --> 00:09:04,210 for you to do, it's something you should do more, or you should try to at least 145 00:09:04,210 --> 00:09:08,474 think about how to do. And, so think about fairness It's an 146 00:09:08,474 --> 00:09:13,636 amazing im, important idea. And if we can only understand it better, I 147 00:09:13,636 --> 00:09:17,427 think we could get people to make very different decisions. 148 00:09:17,428 --> 00:09:20,160 One other interesting story about fairness is the following. 149 00:09:20,160 --> 00:09:22,870 Imagine you're at the beach with friend of yours. 150 00:09:22,870 --> 00:09:25,524 It's wonderful day, the temperature is great. 151 00:09:25,525 --> 00:09:29,516 The ocean is fantastic, and your friend tells you that they're going to get some 152 00:09:29,516 --> 00:09:32,327 beer and do you want some. And you say yes, I want some. 153 00:09:32,328 --> 00:09:35,070 Then your friend says look, I'm going to and get beer but I don't know how much it 154 00:09:35,070 --> 00:09:37,762 will cost. So tell me what's the maximum amount that 155 00:09:37,762 --> 00:09:40,375 you will pay. If they'll charge more than that, I will 156 00:09:40,375 --> 00:09:42,919 not get the beer. If they charge less, I'll pay for it, and 157 00:09:42,919 --> 00:09:45,775 then you'll give me back the money, whatever they, they charge. 158 00:09:45,776 --> 00:09:48,870 Okay. So now your task is to say, what is the 159 00:09:48,870 --> 00:09:51,787 maximum amount of money you're willing to pay for beer? 160 00:09:51,788 --> 00:09:56,155 And the friend is either telling you they're going to a hotel, of they're going 161 00:09:56,155 --> 00:09:58,030 to a grocery store. What will happen? 162 00:09:58,030 --> 00:10:01,858 People give a much higher amount to the hotel than to the grocery store. 163 00:10:01,858 --> 00:10:04,300 Why? Because the joy of drinking beer on the 164 00:10:04,300 --> 00:10:07,230 beach changes depending of where the beer came from? 165 00:10:07,230 --> 00:10:10,044 Of course not. If it were, you know there would be trucks 166 00:10:10,044 --> 00:10:14,009 of beer, or going through lobbies of hotels just to increase the quality of the 167 00:10:14,009 --> 00:10:16,984 beer. The beer is the same, but what happened is 168 00:10:16,984 --> 00:10:20,290 you're notion of fairness enters into the process. 169 00:10:20,290 --> 00:10:23,800 You're not just thinking to yourself how much am I going to enjoy sitting on the 170 00:10:23,800 --> 00:10:27,849 beach here and drinking beer. You're saying also what is a fair price. 171 00:10:27,850 --> 00:10:33,710 And if the bill comes from a hotel, your fairness includes the cost of running a 172 00:10:33,710 --> 00:10:37,265 hotel and your willingness to pay, goes up with it. 173 00:10:37,265 --> 00:10:42,762 So, if you think about all these stories about fairness, what they really tell us 174 00:10:42,762 --> 00:10:48,256 is that our understanding of how much we're willing to pay for something, should 175 00:10:48,256 --> 00:10:53,410 in principal comes up from comes from how much value we're getting from it. 176 00:10:53,410 --> 00:10:56,000 We're getting more value, we should be willing to pay more. 177 00:10:56,000 --> 00:10:59,280 We're getting less value, we should be willing to pay less. 178 00:10:59,280 --> 00:11:04,005 But the reality is, that directly assessing how valuable something is: how 179 00:11:04,005 --> 00:11:08,730 much do we enjoy beer, how much are we enjoying getting our doors opened, our 180 00:11:08,730 --> 00:11:12,340 computers recovered, a Coke. All of those things are incredibly hard, 181 00:11:12,340 --> 00:11:15,914 so we're using shortcuts. And one of those shortcuts Is to say how 182 00:11:15,914 --> 00:11:20,688 much effort has been created for me to consume that and if the effort is high 183 00:11:20,688 --> 00:11:24,902 willing to pay more and if the effort is lower willing to pay less. 184 00:11:24,902 --> 00:11:29,097 And it means that as consumers you probably want to think about effort a 185 00:11:29,097 --> 00:11:33,428 little less if you think of it as a biasing tool that gets you to pay too much 186 00:11:33,428 --> 00:11:37,584 or too little based on the effort you want to try and overcome it. 187 00:11:37,585 --> 00:11:40,870 And as producer you might want to say how do I signal effort. 188 00:11:40,870 --> 00:11:45,210 How do I tell peolple how much effort went into it because effort is the main 189 00:11:45,210 --> 00:11:49,830 mechanism, or one of the main mechanisms by which people are going to decide how 190 00:11:49,830 --> 00:11:54,060 much ot pay for something. And as we move into the internet economy, 191 00:11:54,060 --> 00:11:56,800 effort is harder and harder to think about. 192 00:11:56,800 --> 00:11:59,140 Fairness is harder and harder to think about it. 193 00:11:59,140 --> 00:12:03,030 More things are becoming about high fixed costs and low marginal costs. 194 00:12:03,030 --> 00:12:07,134 Most things are hidden, we don't see what, what goes into them. 195 00:12:07,134 --> 00:12:11,808 How, how many hours go into creating a piece of software, for example, or an app. 196 00:12:11,808 --> 00:12:20,864 And, and all of this creating new challenges for effort, the expression of 197 00:12:20,864 --> 00:12:29,723 effort because of that fairness and because of that willingness to pay.