Matching Markets and The Science of Free
The other day, I was reading the book “Predictably Irrational: The Hidden Forces That Shape Our Decisions” by Dr. Dan Ariely. It’s a great book on behavioral economics, leaving you with lots of thought upon finishing, making you question your decisions and your freewill. Chapter 3, “The Cost of Zero Cost”, was one of the chapters that I found especially interesting. As implied from the title, this chapter focuses on the “Zero cost”, or in other words “free” things. Ariely claims that we, humans, are mostly drawn to free stuff, even when it is not the best strategy to go with, regardless of the payoff. To prove this, he conducted a series of experiments.
In these experiments, he offered the subjects a Hershey’s kiss and a Lindt chocolate truffle. In the first experiment, he set the price of a truffle for 15 cents (Actual cost: 30 cents), and a Hershey’s kiss for 1 cent (Actual cost: 1 cent). When he restricted the subjects to chose only one of the options, most of them opted for the Lindt. Thus, choosing the greater payoff.
In the next experiment, he reduced the prices by 1 cent. Hence, Lindt ended up with a price of 14 cents, while Hershey’s ended up being free. In this case, Lindt had a payoff of 16 cents (30-14), yet Hershey’s only had a payoff of 1 cent (1-0). Hence, it is easily seen that the better option, the greater payoff, is a Lindt truffle. However, the result of this experiment were not as expected: The majority ended up choosing Hershey’s, even when it had a very low payoff compared to Lindt.
Upon performing similar experiments, Dan Ariely concluded that people are indeed drawn to free: “Free is more powerful than any rational economic analysis would suggest.”
So, how does this affect matching markets? In class, we learned how to match markets by using the price of the item and the value the buyers have for it. Furthermore, when there were only 2 items yet 3 buyers, we ended up adding an item with zero value and zero cost for each buyer. Then we went on with matching the market, until price clearance occurred. However, what may be flawed in this approach is that we did not take into account how the buyers would react to a free object, even if they had a comparably low value for it. For instance, if we had 3 objects and 3 buyers, with one of the objects being free and having a little value by each buyer, the buyers could still have been drawn to the free object, regardless of the noticeably low payoff.
I think this is a really interesting concept that requires more thinking. I hope you enjoyed reading it, and I would love to discuss this further in the comments!
Predictably Irrational: The Hidden Forces That Shape Our Decisions, Dan Ariely.