The Irrational Power of "Free"

ImageCAUTION: Beware of “FREE” – A money trap could be close by.

In fact, the power of the word “free” actually causes us to make decisions that are downright irrational. It seems that “free” is our brain’s achilles heel – our weak point when it comes to sound financial management.

In Predictably Irrational, behavioral economist Daniel Ariely highlights our irrational behavior in the face of “free”.

To prove his point Ariely presents the following scenario:

Suppose you had the choice of receiving a free $10 Amazon gift certificate or the opportunity to pay seven dollars for a $20 Amazon gift certificate.

Most people instinctively chose the free $10 Amazon gift certificate, even though purchasing the $20 gift certificate brings you more profit – $10 vs $13 ($20-$7) – and thus is the better choice.

To further highlight the irrational power that “free” holds over us, Ariely conducted an experiment using Lindt chocolate truffles and Hershey Kisses.

Lindt chocolates are delicious premium high end treats while Hershey Kisses are pretty common candy fare. Ariely and his colleagues offered passer-bys the choice of purchasing a Lindt truffle for 15 cents or purchasing a Hershey’s Kiss for a penny.

Realizing a great deal when they saw one 73% of the participants chose the Lindt truffle.

The prices were then lowered by a penny – the Lindt chocolate reduced from 15 cents to 14 cents and the Kiss reduced from one penny to FREE.

Even though the Lindt chocolate was still the better bargain and still only 14 cents more expensive than the Hershey’s Kiss, the number of people now choosing the Hershey’s Kiss skyrocketed from 27% to 69%.

The power of the “free” Hershey’s Kiss had silently persuaded people to make the less valuable choice.

 Marketers seize on our irrational choices in the face of “free” all the time.

We sign up for reward credit cards, but we may not realize that the higher interest rate costs us more than any free rewards we accumulate.

We drive out of our way and stand in long lines to take advantage of the free donut giveaway, not realizing we’ll likely buy an additional coffee or other item to go with our free handout. Let’s not mention our wasted time and gas to boot.

We sign up for the gym membership because the first two months are “free”. What they neglect to tell us is that this club has a special “initiation” fee that costs more than those two “free” months are worth.

How do you protect yourself from making poor choices when confronted with “free”?

When you see “free” take the chance to evaluate whether or not the offer is truly worth it. Are the “free” video games bundled with the video game bonus package really worth the higher cost of the bundle?

Whenever you see “free”, check the fine print to see if certain conditions apply – they almost always do. In my previous example, the credit report is only “free” after you sign up for their $14.95 per month credit monitoring service.

Consider the opportunity costs of your “free” offer. The opportunity cost is simply what you would do if you didn’t take advantage of the “free’” offer. If you wait two hours in line to get a free movie pass your opportunity cost is the activities or things you could have done during the two hours you idly waited in line.

Never be seduced by the power of “free”. Double check to make sure you’re really getting something for nothing.