Cognitively Yours 1.22
"FREE if deployed properly can be counter-intuitive and can have a great deal of power and it makes sense"
We have come across instances when something is given free - a sachet of filter coffee powder when one does not have a coffee filter or brewing machine at home, a soap which we do not use, many dishes in a buffet which prompts us to pile the items liberally on our plate, though our stomach is full, the calendars and diaries which we receive during the New Year.
Getting free makes us very good. Zero is not a price. It is an emotional hot button and a source of irrational excitement - Dan Ariely.
Would we buy something, if it were discounted from Rs 100 to Rs 20? May be. Would we buy something if it were discounted from Rs 100 to Rs 5? May be. Would we buy if it were discounted from Rs 100 to zero? The answer is obvious. What makes the zero cost so irresistible? Free makes us purchase things that we would have never considered purchasing. We stand in queues to get something free, which we may not use at all. We have plenty of keychains, calendars, pencils, wallets which have come free and we carry them home just to throw them in a corner/barely use it. “Everything does have a price, but not all prices necessarily appear on labels.”
Zero has special relevance to our country. It is believed that Indian astronomer Aryabhata sat up in the bed one morning and exclaimed - “Sthanam Sthanam Dasa Gunam”, which roughly translates as “Place to Place Ten Times in Value”. Now Zero has spread all over the world. History apart, the concept of zero applied to money is less clearly understood, though free has huge implications, extending not only to discount prices and promotions, but also how free can be used to help us make decisions that would benefit ourselves and society.
Dan Ariely mentions about an experiment conducted by him along with his student. There was a table where two kinds of chocolates were placed with a large sign board above the table reading “One chocolate per customer”. The two kinds of chocolates were Lindt truffles - premium priced and Hershey’s Kisses - ordinary and economical.
The price of Lindt Truffle was set at 15 cents and a Kiss at 1 cent. The customers with a good deal of rationality, compared the price and quality of Kiss with the price and quality of Lindt truffle and then exercised their choice. About 73 per cent chose the Lindt Truffle while only 27 per cent chose the Kiss.
In the next round, Lindt was offered for 14 cents and Kisses for free - merely lowered the price of both by one cent. But, what a difference it made! The humble Hersey’s Kiss became a big favourite. 69 per cent of the customers (up from 27 per cent) chose the FREE. Lindt - customers choosing it reduced to 31 per cent from 73 per cent.
There are many times when getting free does make sense, when what we get free is the one which we will buy anyhow, paying a price. The critical issue arises when free becomes a struggle between a free item and another item - the struggle leading us to make a bad decision. We go to the stores with an intention to buy a product but end-up buying a competing product just because it offered something free. This is a case in which you gave-up a better deal and settled for something that was not what you wanted, just because you were lured by the FREE.
What is about FREE that is so enticing? Most transactions have an upside and downside, but when something is FREE, we forget the downside. FREE gives us such an emotional charge that we perceive what is being offered as immensely more valuable than that it really is. But, suppose we choose the item that’s not free. The downside is the risk of making a poor decision and the possibility of loss. So, given the choice, we choose what is FREE.
Dan Ariely quotes the example of 2007 when a certain manufacturer of electronics item offered seven FREE DVDs titles along with a high-definition player. The moot question here is whether you need a high definition player for day-to-day viewing. Whether the DVD players will remain in vogue and whether they would become obsolete soon, which eventually turned out to be true. Similarly, during 1990s we saw a lot of NBFCs giving gifts to investors for their investments. The investors started focusing and comparing the gifts, rather than evaluate the financials of the company accepting the deposits.
Another glaring example where we fall-free to FREE is buying through online. If we buy a product we need for Rs 400 we are prompted with a message that delivery charges of Rs 50 will be free, if our total purchases are beyond Rs 600 forcing us to overspend Rs 200 on items we may not require, to save Rs 50.
The concept of zero also applies to time. Time spent on one activity is time taken away from another. So, if we spend an hour waiting for our turn to get something free or filling up an elaborate form to get a discount, something else we are not doing at that time. There is an opportunity cost lost. FREE has made investing a sub-optimal one. Investors who are willing to pay for any service, do not wish to pay for the investment advice.
Suppose you want a new car. It costs Rs 10 lakhs. You have three options 1) Pay Rs. 10 lakhs for it, 2) find a cheaper used one, or 3) steal it. Of course, none would like the third option, because the consequences outweigh the upside.
You want to earn 11 per cent annual returns over the next 30 years from equity, so that you can retire in peace. Does this reward come free? Definitely not. The world is never an “unicorn”. There is a price tag - accepting volatility and upheaval. Like the car, you have a few options. You can pay this price, accepting volatility and upheaval or you can find an asset with less uncertainty and a lower payoff, the equivalent of a used car.
Many people in investing ironically choose the third option. Like a car thief - from tricks and strategies to get the return without paying the price or paying for advice. They trade in and out. They attempt to sell before the next slide and buy before the next bull run. Like in last March 2020, investors realise that volatility is real and common. Money Gods do not treat lightly upon those who seek a reward without paying the price. Some car thieves will get away with it. As it happened last year post the slide, many were caught napping and paid a huge price to it.
Why do so many people who are willing to pay brokerages for house, cars, vacation etc avoid paying the price of good investment returns and also for the investment advice. The answer is simple. The price of investing success is not immediately obvious. It is not a price tag you can see. It does not feel like a fee for getting something good. It feels like a fine for doing something wrong and hence everyone likes to avoid. Though it sounds trivial, thinking of market volatility and price of advice as a fee rather than a fine is an important part of developing the kind of mindset that lets you stick around long enough for investing gains to work in your favour.
With Wimbledon around the corner, and expectations of rains. There is no guarantee that there will be match as there could be rain. If you view the tickets as a fine, you will never enjoy the magic. Find the price and pay it.
FREE can be used to drive social policy. We want everyone to be vaccinated to fight against COVID-19. It makes really sense to give it free rather than charge a nominal fee. FREE is an ace on hand, if we know how to play it. FREE if deployed properly can be counter-intuitive and can have a great deal of power and it makes sense.
References: Predictably Irrational by Dan Ariely, The Psychology of Money by Morgan Housel
Photo credit: @redgreystock (edited) - www.freepik.com
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