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Predictably Irrational

I love reading popular books about economics.  I’ve always been interested in economics, beginning when I was in college. I took a couple of different economics courses as an undergraduate, and have continued reading books on the topic every few years.

Recently I started a book called Predictably Irrational by Dan Ariely, an economist at the Massachusetts Institute of Technology, or what we commonly call MIT, one of the best universities in the U.S. for science and math. The book is part of a larger movement in economics called behavioral economics, where economists combine psychology with their traditional tools of research to understand how people behave when it comes to (as it relates to) money, work, trade, and other economically-related activities. The book is basically a description of several experiments that Ariely has done in the past several years.

FreeOne section of the book discusses what happens when businesses give away things free (or “FREE!” as Ariely writes it). Everyone likes things that are free, and businesses on the Internet and in the “real” world often will give things away (give things for free) to customers as a way of getting more people to pay attention to their products. But can “free” actually be a bad thing for us?

Ariely conducted some experiments on how people reacted to things that were FREE! He offered a group of students two kinds of chocolates: a small piece of very good, well-known chocolate for 15 cents, and a small piece of chocolate that was not very good quality for 1 cent. The good chocolate piece was probably worth $1.00, so getting it for 15 cents was a very good deal, but the poor quality chocolate was only worth about 5 cents, so getting it for 1 cent wasn’t a great deal (a good bargain, where you get something cheaper than normal).

Which would you choose? Most people chose the high quality chocolate for 15 cents, since it was much cheaper than normal. That’s not a surprise. But then Ariely lowered the price of both pieces of chocolate by 1 cent – 14 cents for the good quality chocolate, 0 cents (FREE!) for the low quality chocolate. Remember that the high quality chocolate is still a much better bargain than the low quality one. If people were rational (thinking correctly or intelligently), then they should still choose the good quality chocolate. But that isn’t what happened. The majority of people actually choose the FREE! chocoloate. This doesn’t make sense in our normal way of understanding economic behavior. People should choose the best deal, which is the good chocolate for 14 cents, but they don’t. They choose the FREE! item instead.

What is going on (happening) here? Part of the explanation Ariely gives is that people want to get a good bargain, but they also want to minimize risk. That is, they want to reduce or lower the chance that they will make a mistake. If you pay 15 cents for a piece of chocolate, and then you don’t actually like it when you eat it, you are out (you have lost) 15 cents. But when something is FREE! and you don’t like it, you haven’t lost anything. People would prefer not to take a risk over getting a better bargain.

So remember next time you take something for FREE! instead of paying a little money, you may actually be better off (be in a better situation) by paying for something else.

~Jeff

12 Responses to “Predictably Irrational”

  1. stiles Says:

    hi, Its 1:02 in the moring,china, I guess Its 1:02 at los angeles :)

    I always check your blog befor I go to bed everyday, It has became a habit and hobbie of mine for the last several months, from the first time I know ESL.COM

    Its intereting and useful to get ideas in “plain english”,

    thankyou for your work,
    and wish you a good day :)

  2. emiliano Says:

    Absolutely true, everybody likes much more free subjet without considering anything about quality, and I think that the fact of not paying any amount for something useful or not make us happy and we feel more clever that other people that have paid just a bit or more despite quality.
    My wife always tell me that it is necessary to pay something for things, products, or services, as being free people should appreciate less these things, that if they have to pay just a little, also people do not care about free services or which ever thing they received, in fact may be some abuse about social services when it cost nothing than when you have to pay just a bit.
    Jeff, you have appointed a very interesting matter and I have to think a lot about it, because I see inside of myselft and I really do not know what place should be occupied in that classification. I have to be very sure about what I really want just to pay something having other more or less similar one by free.
    And now I have to think about my silly behavour, Jeff you are very mischievous…..but
    at least I can’t eat chocolate, and it should be impossible for me to choose one of them……I am released.

  3. Laurent Says:

    Hello Jeff,
    That makes me think of the newpapers they give for free in the metros or in the streets in some EU countries, like in my country (France). The content of these newspapers is often of very poor quality, yet many people read them – (I used to do it myself, but now I prefer to read standard newspapers). All you’ve read is soon forgotten, because it’s so shallow and boring. Moreover, those newspapers are not really free, in the sense that they are financed by advertising.

  4. Gulls Says:

    We must be very carefully with maxims as

    “Cheaper brands are false economy”
    “You get what you pay for”

    The principle is correct, but unfair traders do often artifically increase the prices of their inferior products.
    It is for the consumer often very difficult to make the right choise.

  5. Hamude Says:

    i have noticed it too here in EU countries, specially be closing a mobile contract, so they give you one or maybe two for free but when man take a look about the monthly rate and the cost of calling per minute then you can recognize quicklly that you pay in indirect way a lot for the mobile phones that you have got for free

    it is really a good topic

  6. claudio from italy Says:

    It’s really interesting, but i’d like to know the behavior of the people that spend more than the worth for luxury.

  7. Matteo Says:

    There are exceptions sometimes.
    Just consider ESLPOD as an example: it’s FREE, but it is still a very good “chocolate”, isn’t it ?
    ;-)

  8. Ari Fernando Ramos Says:

    Dear Jeff
    I like reading economics also. I’ve already read some books about behavioral economics and I’m sceptical about its assertions.If I knew the free poor quality product before, what it happens always, I’d rather the good quality even paying for it. My congratulation for the suject you chose.

  9. belay Says:

    It is very true that most fo us run for less price with great amount, but may be it is nothing in quality.
    because we sett up uor mind considering quantity, not quality. so this masage is very helpful for us to resett up
    our mind and being rational.
    THANK YOU SO MUCH JEFF FOR YOUR ALWAYS GREAT JOB.

  10. belay Says:

    Matteo, you so surprize me that what you said.
    you absoulutly right. you got it!!!!!!!!!!!!!!!!!!!!!!!!!!
    ESLPOD is FREE. but it is sweat “chocolet”.

  11. emiliano Says:

    The most valuable things should be free, such as love, fidelity, faith, respect, time, and of course friendship, and I think our relationship with ESL belongs to these valuable things that are free. May be because the way ESL is made has something of all these kind of things that can’t pay with nothing than love.
    Thank you so much.

  12. Lucyna Says:

    It’s a very interesting article. Everything is truth. Thanks.