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”.