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The Most Powerful Four-Letter Word Isn't What You Think It Is

October 25, 2012

 

 

Our brains are programmed not to lose. It's called loss aversion, and it makes sense. If our ancient ancestors lost even a meager food cache, that could mean the difference between life and death.

 

This vestigial neural code is still with us today, even though nowadays, grocery stores are chock full of vitamins in the shape of cartoon characters and nutrition-dense produce like rutabaga. This turnip/cabbage hybrid is a staple at Best family Thanksgivings, over the loud protest of my daughter and editor Jessica, who continues to claim that it tastes like it's been cooked in a dirty sweat sock. (Editor's note: Because it does.)

 

Loss aversion is not just reserved for food. It shows up all over the place. Las Vegas casinos rely on it to keep gamblers going. Customers don't want to walk away from the slots with less than they started, so they continue to gamble, and in the process pretty much insure they will, that's right, lose more money. It's an irony that seems to be lost on no one, except for maybe the gambler.

 

Perhaps my favorite loss aversion story is the one told by Dan Arliey in his book Predictably Irrational. Ariely points out that one of the clearest ways to view loss aversion is by looking at what happens when something is offered for free.

 

Free is a seducer that causes us to scoop up leftover pens and penny candies from seminars and conference rooms, tiny bottles of weird-smelling shampoo from hotels, that second truckload of ShamWow miracle cleaning clothes you got for buying the first truckload (offer not available in retail stores), and don't forget that unbelievable chance at your local mega store to buy two pairs of sweat socks and get the third pair for free. (Which sets you up quite nicely for your rutabaga casserole this Thanksgiving.)

 

In an experiment where Lindt's truffles were sold for 17 cents and Hershey's kisses sold for a penny, Ariely showed that roughly 70 percent of the people chose truffles over  kisses. Then he dropped both prices by one cent.

 

When the price of the kisses hit rock bottom (FREE), people chose the kisses over the truffles by about 70%, a pretty stark reversal. The taste of the chocolate hadn't changed. Free kisses simply removed loss aversion. In other words, free trumps the idea of any risk due to loss. Free sucks the rational decision-making out of our prefrontal cortex faster than a Dyson cyclone vacumn can pull the dirt out of Berber carpet.

 

In another experiment, Ariely proved that, if given the opportunity to get a free $10 Amazon gift card or a $20 Amazon gift card for 7 dollars, most people chose the free card. Objectively, the $20 card is a better value. Still, the notion of getting something for free seems to throw our logic to the dogs.

 

Whether it's amazon gift cards or Hershey kisses, there is a value association that should remain constant. Yet when we insert free into the equation, our rational abilities falter. As the title of Ariely's book suggests, we falter in a predictable way.

 

When it comes to this Thanksgiving, however, I can confidently make the following prediction. Jessica Best will avoid the rutabaga casserole, even though it is available to her at no cost. (Editor's note: darn tootin'.) Perhaps in the end, there is no such thing as a free lunch.

 

 

 

in the end, there is no such thing as a free lunch.

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