Your answer to this question may surprise you.

Suppose you were offered a choice between two Amazon gift cards. You had 5 seconds to choose, so think quickly!

Choice 1 – A FREE $10 Amazon gift card.

Choice 2 – A $20 Amazon gift card for $7.

3…2…1 Times up! Which do you choose?

If you jumped for the FREE certificate, you would have found yourself in the majority….in making the less profitable decision.

A free $10 gift card results in a $10 dollar profit

On the flip side, a $20 gift card that you pay $7 for results in a $13 profit!

There is an irrational behavior that coincides with the decision to choose the FREE gift card. It has to do with a thought bias called “Loss Aversion”.

Loss Aversion has to do with the fact the fear of losing something is felt almost twice as strong as the feeling of gaining something. So humans are more influenced by what we can lose, rather than what we can gain.

Most transactions have an upside and a downside, but when something is FREE, we tend to forget the downside. FREE gives us an emotional charge that we perceive what is being offered as immensely more valuable than it really is.

To use Amazon again, they offer FREE shipping on orders over a certain amount, and we find ourselves buying more just to get that FREE shipping. Its interesting, that if I bought one book for $20, paid $10 for shipping, it would be still be a better deal than if I bought three $2o books in order to get FREE shipping. We end up paying twice as much, to buy something for FREE.

The insightful book Predictably Irrational, Revised and Expanded Edition: The Hidden Forces That Shape Our Decisions talks a lot about this concept that Zero is not just another discount, but rather a completely different place. “The difference between two cents and one cent is small, but the difference between one cent and zero is huge!”

There are so many instances where FREE has influenced us to make an irrational decision.

One more example that is in the book illustrates two credit cards.

Credit card 1 – 12% APR, no yearly fee (FREE)

Credit card 2 – 9% APR, $100 yearly fee.

Which would you choose?

According to Predictably Irrational, most people would overemphasize the yearly fee and in pursuit of the FREE offer would end up getting the card that cost them much more in the long run – when they inevitably miss a payment or carry a balance. (When it comes to credit cards, the appeal of FREE is further enhanced because most of us are overoptimistic about our financial future, and overconfident about our ability to always pay our bills on time.)

The allure of FREE is all around us, we feel it constantly and we must stop and think before we act, because as the saying goes “Nobody gets a FREE lunch”.

Advertisements

6 thoughts on “Your answer to this question may surprise you.

  1. There is some perspective here. If you have 0 then free is much more meaningful. In your first example, there maybe a $6 differential in price, however the barrier to entry for the second option is $7. If you have less than $7 than the first choice is always the best. For many people who have grown up with little or nothing, sometimes the ‘free’ or ‘value’ options always appear to be the most appealing as they dont require any costs whatsoever. If you have never had the opportunity to save any money because much of your life you have been living hand to mouth, you may not be able to invest and cover the yearly fees or upfront costs. To clarify, my point is that sometimes free is best if you have nothing at all, and that sometimes when living under such conditions for long periods of time trains people to look for free and ignore things that may have cost. I am not suggesting this is good decision making, but that it is merely a result of a type of survival economics that many have to unfortunately practice.

    Liked by 1 person

    1. Perhaps many are in the situation where they cannot possibly save because they are making poor fiscal descions such as choosing the free option where they non free option would be better. I have had to work hard for the things that I have, and sometimes it meant not getting caught up in schemes or zero money down scams. Remember “Buy one get one free” is the same as buying one for 50% off. You still have to buy something.

      Liked by 1 person

      1. Survival is not a zero sum game unlike a budget. If the only way you can provide for your family is by buying the ‘Buy one get one free’ option then people will choose that option. One example that comes to mind is this. Supermarkets in poor neighborhoods are often MORE expensive than ones in richer neighborhoods. Now there are probably many reasons for this, like food stamps or supply and demand issues, but it still stands that poorer people end up paying more for the same food. If they had more means they may be able to drive across town and save a few dollars off their grocery bill, but unfortunately they have to take the ‘free’ option and walk to the grocery store .

        Like

    2. Thanks for that perspective! The main point I was trying to make was how FREE influences us to make irrational decisions that aren’t necessarily in our favor. However, to clarify and reiterate what you said, these decisions are subjective. 🙂

      Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s