1 00:00:00,755 --> 00:00:05,096 Free, of course, is a very, very exciting price. 2 00:00:05,096 --> 00:00:11,624 We see people doing all kinds of crazy things, or seems to be crazy things, for 3 00:00:11,624 --> 00:00:14,956 free. We see relatively wealthy people stand a 4 00:00:14,956 --> 00:00:19,876 long time in line to get free Ben & Jerry's ice cream, or get something for 5 00:00:19,876 --> 00:00:22,472 free. And you can ask yourself, would the same 6 00:00:22,472 --> 00:00:26,463 people stand in line for the same amount of time to get free you know, $2.25. 7 00:00:26,463 --> 00:00:31,793 Most likely not. We see sometimes, people in flights, cross 8 00:00:31,793 --> 00:00:37,029 Atlantic flights, where the alcohol is free, drinking lots and lots of alcohol on 9 00:00:37,029 --> 00:00:40,580 those flights. Of course making their ability to recover 10 00:00:40,580 --> 00:00:43,843 from the hangover, from the jet lag, much, much lower. 11 00:00:43,843 --> 00:00:49,612 There's all kind of things that seems to be, questioning our ability to think 12 00:00:49,612 --> 00:00:55,090 rationally when free is involved. And, but, but these are not exact tests of 13 00:00:55,090 --> 00:00:59,057 this idea, so we tried to examine it a more precise way. 14 00:00:59,058 --> 00:01:04,205 So imagine I gave you the following, I said look you can have this truffle, this 15 00:01:04,205 --> 00:01:11,620 wonderful chocolate truffle for .25 cents. Or you could have this small little candy, 16 00:01:11,620 --> 00:01:14,675 for 1 penny. How are you sup-, and you can have only 17 00:01:14,675 --> 00:01:17,407 one of the two, how should you look at this choice? 18 00:01:17,408 --> 00:01:20,946 You should say, what's the benefit of this truffle? 19 00:01:20,946 --> 00:01:25,235 How much joy am I expecting to get? How much cost does it have? 20 00:01:25,235 --> 00:01:29,274 25 Cents. And how much joy am I expecting to have 21 00:01:29,274 --> 00:01:33,737 from this small candy? And how much cost does it have, one cent. 22 00:01:33,738 --> 00:01:39,043 So in reality, when you, given the choice between the two, you should say what the 23 00:01:39,043 --> 00:01:43,620 difference in price is 24 cents. How is the difference in price compared to 24 00:01:43,620 --> 00:01:47,471 the difference in quality? If the difference in quality is larger, 25 00:01:47,471 --> 00:01:50,530 then you should say, let's get the expensive truffle. 26 00:01:50,530 --> 00:01:54,556 If the difference in quality is not worth the price difference, you should say, 27 00:01:54,556 --> 00:01:57,870 let's get the cheap chocolate. Now what happen when you give people this 28 00:01:57,870 --> 00:02:00,842 choice? Most people, the vast, vast majority said, 29 00:02:00,842 --> 00:02:04,150 give me the better, the better truffle for more money. 30 00:02:04,150 --> 00:02:08,259 But what if we reduce both prices by $0.01? 31 00:02:08,259 --> 00:02:13,669 Instead of, let's say, 25 and 1, it's 24 and 0. 32 00:02:13,669 --> 00:02:17,286 What happens now? It's the same computation should carry 33 00:02:17,286 --> 00:02:19,223 out. What's the difference in price? 34 00:02:19,223 --> 00:02:21,298 24 Cents. What's the difference in quality, the same 35 00:02:21,298 --> 00:02:22,780 thing. Which one is larger? 36 00:02:22,780 --> 00:02:27,667 But that's not what happened. Now most people go for the one for free. 37 00:02:27,668 --> 00:02:32,110 Most people say oh, this one is free. And they just go for it, almost, almost 38 00:02:32,110 --> 00:02:34,826 everybody. Now you could say, well you know when 39 00:02:34,826 --> 00:02:39,050 something is free, you don't have to take your wallet out, you don't have to pay, 40 00:02:39,050 --> 00:02:41,760 and so on. So we also did this experiment when people 41 00:02:41,760 --> 00:02:46,088 checked out from the supermarket. People bought all kind of things, they 42 00:02:46,088 --> 00:02:51,539 were going to pay anyway, and then at the cashier, they saw these two offers, either 43 00:02:51,539 --> 00:02:54,450 25 and 1 or 24 and zero. They were going to pay anyway. 44 00:02:54,450 --> 00:02:58,410 They were going to take out their credit card or cash and pay anyway, so it was not 45 00:02:58,410 --> 00:03:01,204 adding to the hassle in any way. But what happened now? 46 00:03:01,204 --> 00:03:04,970 Still, people like the one, the one with the zero. 47 00:03:04,970 --> 00:03:09,850 So the idea here is that the moment something involves zero, we're overly 48 00:03:09,850 --> 00:03:12,473 excited with it. We don't see the downside. 49 00:03:12,474 --> 00:03:16,438 You know, even if you're in line, standing for a long time for a free Ben & Jerry's 50 00:03:16,438 --> 00:03:19,610 ice cream, you don't see the cost. You don't see the cost of your time. 51 00:03:19,610 --> 00:03:23,279 You think about this much more emotionally appealing. 52 00:03:23,279 --> 00:03:27,315 One of my favorite experiments on this, by the way, was with kids. 53 00:03:27,316 --> 00:03:32,244 This was Halloween, so I was standing out at my house on the porch. 54 00:03:32,245 --> 00:03:37,127 And kids were coming, and as they were coming I said please put your hand out. 55 00:03:37,128 --> 00:03:41,040 And they put their hand, and I put some Hershey Kisses on, some small candies on 56 00:03:41,040 --> 00:03:44,190 it. I said don't put it back in your bag, hold 57 00:03:44,190 --> 00:03:47,077 it on. Once they had it in their hand, I said, 58 00:03:47,077 --> 00:03:52,390 now I can either give you a small Snickers bar, one ounce, or large Snickers bar, two 59 00:03:52,390 --> 00:03:55,365 ounces. And just have to get you calibrated, every 60 00:03:55,365 --> 00:03:59,919 ounce of a Snickers bar holds between seven and eight Hershey kisses in terms of 61 00:03:59,919 --> 00:04:02,900 weight, so what's the right, what's the right deal? 62 00:04:02,900 --> 00:04:07,657 Here's what I offered them, I said to half of them, I said if you give me one Hershey 63 00:04:07,657 --> 00:04:11,790 kiss I'll give you the small one. If you give me two Hersey kisses I'll give 64 00:04:11,790 --> 00:04:15,360 you the big one. So for one extra investment of a Hersey 65 00:04:15,360 --> 00:04:19,177 kiss they could get another ounce of Snickers bar. 66 00:04:19,178 --> 00:04:23,950 Paying them 7 to 1 in chocolate per weight, plus I think it's a better 67 00:04:23,950 --> 00:04:25,882 chocolate. And what happens? 68 00:04:25,882 --> 00:04:30,544 The kids saw this good, deal they gave me two Hersey kisses an took the big one. 69 00:04:30,545 --> 00:04:35,698 That's great, but in this way, both transactions, the small Snickers bar and 70 00:04:35,698 --> 00:04:39,577 the large Snickers bar, involve them giving me something. 71 00:04:39,578 --> 00:04:42,297 For another group of kids, I reduce the price. 72 00:04:42,298 --> 00:04:46,885 I said, what would you like, the small Snickers bar for nothing, or the big 73 00:04:46,885 --> 00:04:51,395 Snickers bar for one Hershey kiss? Now again they had to give one extra 74 00:04:51,395 --> 00:04:55,150 Hershey kiss to get the big one and again it's a great deal. 75 00:04:55,150 --> 00:04:57,840 High return on investment, better chocolate. 76 00:04:57,840 --> 00:05:01,240 What happened? Now almost nobody wanted it. 77 00:05:01,240 --> 00:05:06,120 So all of these ideas suggest that once something is free, or at least it's 78 00:05:06,120 --> 00:05:09,060 phrased as free, we don't see the cost of it. 79 00:05:09,060 --> 00:05:13,842 We don't see the downside of it and we're overly attracted to it. 80 00:05:13,842 --> 00:05:16,150 Now you can think about all kinds of things in the market. 81 00:05:16,150 --> 00:05:21,910 You can think all kinds of things that, we should make free if we want to incentivize 82 00:05:21,910 --> 00:05:26,664 people to behave in a certain way. For example, maybe we want to take some 83 00:05:26,664 --> 00:05:30,562 unpleasant medical exams, and not have any co-pay for them. 84 00:05:30,562 --> 00:05:34,745 Y'know, I don't know anybody who wants to have colonoscopies, for example, right? 85 00:05:34,745 --> 00:05:39,568 Why do we have a co-pay for colonoscopy? Maybe we should have it at zero and that 86 00:05:39,568 --> 00:05:44,260 would get people to be more attracted to, to this exam, or at least less repulsed by 87 00:05:44,260 --> 00:05:47,389 them. Maybe we want to take, eh, examples when 88 00:05:47,389 --> 00:05:51,721 we give people tax, tax discounts to do something that is good for the 89 00:05:51,721 --> 00:05:54,730 environment. Maybe tax discounts are not enough, maybe 90 00:05:54,730 --> 00:05:57,850 we should make it free. The moment you understand that free is a 91 00:05:57,850 --> 00:06:01,930 special price, that people think about it as different than all other prices, you 92 00:06:01,930 --> 00:06:05,770 could think differently about how to implement it and how to get people to use 93 00:06:05,770 --> 00:06:10,947 it. The last thing I want to say about, the 94 00:06:10,947 --> 00:06:15,667 price of zero is that it also works for part of the product. 95 00:06:15,668 --> 00:06:19,537 So for example, imagine that I'm selling you a book. 96 00:06:19,538 --> 00:06:25,660 And I can sell you the book for $15, and I can sell you the shipping of the book for 97 00:06:25,660 --> 00:06:29,398 $5, so together it's $20. So together it's $20 and imagine three 98 00:06:29,398 --> 00:06:32,013 ways. I can either send you the book for $10 and 99 00:06:32,013 --> 00:06:35,010 shipping for $10. I can sell you the book for $20 and 100 00:06:35,010 --> 00:06:38,046 shipping for 0. Or I can sell you the book for 0 and 101 00:06:38,046 --> 00:06:41,597 shipping for $20. All of those are financially equivalent. 102 00:06:41,598 --> 00:06:45,247 Which one is the worst? They want that you're paying for the book 103 00:06:45,247 --> 00:06:50,007 and you're paying for the shipping, $10 each, because now, you don't get anything 104 00:06:50,007 --> 00:06:53,740 for free. In contrast, what happens when the book is 105 00:06:53,740 --> 00:06:58,283 20 and shipping is zero, that's great. But when the book is zero and 20 is 106 00:06:58,283 --> 00:07:02,177 shipping, that turns out to be the best, now you can think about getting the book 107 00:07:02,177 --> 00:07:05,784 for nothing. And a final advice for life. 108 00:07:05,784 --> 00:07:10,744 Eh, when you go out to dinner, with friends, there's all kinds of ways in 109 00:07:10,744 --> 00:07:14,347 which you can manage the bill at the end of the meal. 110 00:07:14,348 --> 00:07:18,447 And I think the worst way to deal with this is for each person to see exactly 111 00:07:18,447 --> 00:07:23,034 what they ordered and exactly split the bill accordingly to whats correct. 112 00:07:23,035 --> 00:07:27,160 And the reason why I think it's a bad ideal, is because the end of the 113 00:07:27,160 --> 00:07:30,940 experience changes dramatic how we view the whole experience. 114 00:07:30,941 --> 00:07:34,009 And if, at the end of the meal, you're going to penny pinch and worry about 115 00:07:34,009 --> 00:07:38,268 something, and debate with somebody. Oh, you had to bite from my, creme brulee, 116 00:07:38,268 --> 00:07:40,807 and I took an olive from your salad and so on. 117 00:07:40,807 --> 00:07:45,250 And that's kind of going to put a damper on the end of the experience, and 118 00:07:45,250 --> 00:07:48,926 therefore make it less appealing. A better approach, you just split the 119 00:07:48,926 --> 00:07:51,815 bill. No matter what you got, let's split, split 120 00:07:51,815 --> 00:07:55,146 the bill, in general. Now with some people it might not work as 121 00:07:55,146 --> 00:07:58,214 well, and sometimes people eat dramatically different things, but in 122 00:07:58,214 --> 00:08:02,474 general it's a good strategy. But the strategy I like the best is for 123 00:08:02,474 --> 00:08:06,390 one person to pay, and to alternate who is paying. 124 00:08:06,390 --> 00:08:10,460 Why do I like this approach? Because two things, one is the pain of 125 00:08:10,460 --> 00:08:13,169 paying and the other one is the effect of free. 126 00:08:14,310 --> 00:08:18,036 If you're going out with one friend, and you're buying, and they're getting it, for 127 00:08:18,036 --> 00:08:22,460 them, they got the free meal, it's great. And free meal is not just $1 less than 128 00:08:22,460 --> 00:08:27,730 paying $1, or not just $20 less than 20, free meal is a special thing, you get 129 00:08:27,730 --> 00:08:31,790 extra happiness out of that. And of course next time you would get the 130 00:08:31,790 --> 00:08:35,092 free meal and so on. On top of that, the person who is treating 131 00:08:35,092 --> 00:08:39,113 for the free meal paying, feels good now. They're not just paying for their meal, 132 00:08:39,113 --> 00:08:41,750 they're treating the other person, that's another benefit. 133 00:08:41,750 --> 00:08:47,228 But the other thing to realize, the pain of paying, the amount of psychological 134 00:08:47,228 --> 00:08:51,658 agony we get from parting with our money is not a linear its not. 135 00:08:51,658 --> 00:08:56,718 It's not increasing at the same rate as the amount of money is increasing. 136 00:08:56,718 --> 00:09:02,894 So paying, let's say $10, is much worse than paying 0. 137 00:09:02,894 --> 00:09:06,380 But paying 20 is not much worse than paying 10, it's a little worse but not 138 00:09:06,380 --> 00:09:09,110 much. And paying 40 is not twice as bad as 139 00:09:09,110 --> 00:09:11,935 paying 20. So the relationship between how much 140 00:09:11,935 --> 00:09:16,680 you're paying and the pain of paying has the same diminishing return, pattern we've 141 00:09:16,680 --> 00:09:20,314 talked about before. And because of that, if you take a bill, 142 00:09:20,314 --> 00:09:25,445 you split it to two people, both people have the agony of, let's say, paying $20. 143 00:09:25,445 --> 00:09:31,590 But if one person gets to pay $40, they don't get double that agony. 144 00:09:31,590 --> 00:09:36,134 So in some it's always a good deal to alternate, not always, but in most cases, 145 00:09:36,134 --> 00:09:41,156 it's a good deal to alternate. Somebody get the meal the meal for free, 146 00:09:41,156 --> 00:09:46,978 the other person feels that their treating and the accumulation of the pain of paying 147 00:09:46,978 --> 00:09:50,683 is not, eh, is not doubling, it's actually good deal.